84454 Federal Register / Vol. 88, No. 232 / Tuesday, December 5, 2023 / Rules and Regulations 

1This adopting release also modifies the 

proposed CFR designations to ensure the regulatory 

text conforms with section 2.13 of the Document 

Drafting Handbook. See 1 CFR 21.11; Office of the 

Federal Register, Document Drafting Handbook 

(Aug. 2018 Edition, Revision 2.1, dated Oct. 2023), 

https://www.archives.gov/files/federal-register/ 

write/handbook/ddh.pdf. Because the Commission 

proposed the new rules to contain an uppercase 

letter in their CFR citations, the Commission is 

modifying the CFR section designations at adoption 

to replace each such uppercase letter with the 

corresponding lowercase letter. Accordingly, 17 

CFR 240.17Ad–25 will be designated at adoption as 

17 CFR 240.17ad–25. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–98959; File No. S7–21–22] 

RIN 3235–0695 

Clearing Agency Governance and 

Conflicts of Interest 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

adopting rules under the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’) 

to improve the governance of clearing 

agencies registered with the 

Commission (‘‘registered clearing 

agencies’’) by reducing the likelihood 

that conflicts of interest may influence 

the board of directors or equivalent 

governing body (‘‘board’’) of a registered 

clearing agency. The rules identify 

certain responsibilities of the board, 

increase transparency into board 

governance, and, more generally, 

improve the alignment of incentives 

among owners and participants of a 

registered clearing agency. In support of 

these objectives, the rules establish new 

requirements for board and committee 

composition, independent directors, 

management of conflicts of interest, and 

board oversight. 

DATES: 

Effective date: February 5, 2024. 

Compliance date: The applicable 

compliance dates are discussed in Part 

III of this release. 

FOR FURTHER INFORMATION CONTACT: 

Matthew Lee, Assistant Director, 

Stephanie Park, Senior Special Counsel, 

Claire Noakes, Special Counsel, Jenny 

Ogasawara, Branch Chief, and Haley 

Holliday, Attorney-Adviser, at (202) 

551–5710, Office of Clearance and 

Settlement, Division of Trading and 

Markets; Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–7010. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting 17 CFR 

240.17ad–25 (‘‘Rule 17Ad–25’’) under 

the Exchange Act to establish new 

requirements for the board governance 

of registered clearing agencies and for 

the management of conflicts of interest 

by registered clearing agencies.1 Below 

is a table of citations to the rules being 

adopted in this release: 

Commission reference CFR citation 

(17 CFR) 

Securities Exchange Act 

of 1934 (‘‘Exchange 

Act’’): 

Rule 17Ad–25 ............. § 240.17ad–25.

Rule 17Ad–25(a) ......... § 240.17ad–25(a).

Rule 17Ad–25(b) ......... § 240.17ad–25(b).

Rule 17Ad–25(b)(1) .... § 240.17ad–25(b)(1).

Rule 17Ad–25(b)(2) .... § 240.17ad–25(b)(2).

Rule 17Ad–25(b)(2)(i) § 240.17ad–25(b)(2)(i).

Rule 17Ad–25(b)(2)(ii) § 240.17ad–25(b)(2)(ii).

Rule 17Ad–25(b)(2)(iii) § 240.17ad–25(b)(2)(iii).

Rule 17Ad–25(c) ......... § 240.17ad–25(c).

Rule 17Ad–25(c)(1) ..... § 240.17ad–25(c)(1).

Rule 17Ad–25(c)(2) ..... § 240.17ad–25(c)(2).

Rule 17Ad–25(c)(3) ..... § 240.17ad–25(c)(3).

Rule 17Ad–25(c)(4) ..... § 240.17ad–25(c)(4).

Rule 17Ad–25(c)(4)(i) .. § 240.17ad–25(c)(4)(i).

Rule 17Ad–25(c)(4)(ii) § 240.17ad–25(c)(4)(ii).

Rule 17Ad–25(c)(4)(iii) § 240.17ad–25(c)(4)(iii).

Rule 17Ad–25(c)(4)(iv) § 240.17ad–25(c)(4)(iv).

Rule 17Ad–25(d) ......... § 240.17ad–25(d).

Rule 17Ad–25(d)(1) .... § 240.17ad–25(d)(1).

Rule 17Ad–25(d)(2) .... § 240.17ad–25(d)(2).

Rule 17Ad–25(e) ......... § 240.17ad–25(e).

Rule 17Ad–25(f) .......... § 240.17ad–25(f).

Rule 17Ad–25(f)(1) ..... § 240.17ad–25(f)(1).

Rule 17Ad–25(f)(2) ..... § 240.17ad–25(f)(2).

Rule 17Ad–25(f)(3) ..... § 240.17ad–25(f)(3).

Rule 17Ad–25(f)(3)(i) .. § 240.17ad–25(f)(3)(i).

Rule 17Ad–25(f)(3)(ii) .. § 240.17ad–25(f)(3)(ii).

Rule 17Ad–25(f)(4) ..... § 240.17ad–25(f)(4).

Rule 17Ad–25(f)(4)(i) .. § 240.17ad–25(f)(4)(i).

Rule 17Ad–25(f)(4)(ii) .. § 240.17ad–25(f)(4)(ii).

Rule 17Ad–25(f)(5) ..... § 240.17ad–25(f)(5).

Rule 17Ad–25(f)(6) ..... § 240.17Ad–2525(f)(6).

Rule 17Ad–25(g) ......... § 240.17ad–25(g).

Rule 17Ad–2525(g)(1) § 240.17Ad–2525(g)(1).

Rule 17Ad–25(g)(2) .... § 240.17ad–25(g)(2).

Rule 17Ad–25(h) ......... § 240.17ad–25(h).

Rule 17Ad–25(i) .......... § 240.17ad–25(i).

Rule 17Ad–25(i)(1) ...... § 240.17ad–25(i)(1).

Rule 17Ad–25(i)(2) ...... § 240.17ad–25(i)(2).

Rule 17Ad–25(i)(3) ...... § 240.17ad–25(i)(3).

Rule 17Ad–25(i)(4) ...... § 240.17ad–25(i)(4).

Rule 17Ad–25(j) .......... § 240.17ad–25(j).

With respect to board governance, 

Rules 17Ad–25(b), (e), and (f) establish 

requirements for board composition and 

independent directors, as discussed in 

Part II.A. Rules 17Ad–25(c) and (d) 

establish requirements for the 

nominating and risk management 

committees of the board, as discussed in 

Parts II.B and II.C respectively. With 

respect to conflicts of interest, Rules 

17Ad–25(g) and (h) establish 

requirements for policies and 

procedures to identify, document, and 

mitigate or eliminate such conflicts of 

interest, as well as an obligation of 

directors to report such conflicts to the 

registered clearing agency, as discussed 

in Part II.D. In addition, Rules 17Ad–5(i) 

and (j) establish obligations of the board 

to oversee the management of risks from 

relationships with service providers for 

core services, as discussed in Part II.E, 

and to solicit, consider and document 

the views of stakeholders, as discussed 

in Part II.F. 

As discussed further in Part III, the 

compliance date for Rule 17Ad–25 is 

December 5, 2024, except that the 

compliance date for the independence 

requirements of the board and board 

committees in Rules 17Ad–25(b)(1), 

(c)(2), and (e) is December 5, 2025. 

Table of Contents 

I. Introduction

II. Discussion of Comments Received and

Final Rules

A. Board Composition and Requirements

for Independent Directors

1. Proposed Rules 17Ad–25(b), (e), and (f)

2. Overall Views

3. Criteria for Independence

4. Incentive Structures

5. Ownership Structures

6. Circumvention

B. Nominating Committee

1. Proposed Rule 17Ad–25(c)

2. As ‘‘Exclusive Venue’’ for Considering

Nominees

3. Approach to Representation of Small

and Medium-Sized Firms

4. Percent of Directors That Are

Independent Directors

C. Risk Management Committee

1. Proposed Rule 17Ad–25(d)

2. RMC of the Board

3. Annual Requirement To Re-Evaluate

RMC Membership

4. Harmonization With CFTC and EMIR

Requirements

5. Other Comments

D. Conflicts of Interest

1. Proposed Rules 17Ad–25(g) and (h)

1. Mitigation or Elimination of Conflicts

2. Use of ‘‘Reasonably Designed’’ Policies

and Procedures Approach

E. Management of Risks From

Relationships With Service Providers for

Core Services

1. Proposed Rule 17Ad–25(i)

2. Definition of Service Provider for Core

Services

3. Roles of Senior Management and the

Board

F. Obligation To Formally Consider

Stakeholder Viewpoints

1. Proposed Rule 17Ad–25(j)

2. Concern Regarding Duplicative

Requirements

3. Proposed Scope of ‘‘Governance and

Operations’’

4. Frequency and Method of Outreach

5. Use of Fora To Satisfy the Rule

6. Documentation of Stakeholder Views

7. Harmonization With CFTC

Requirements for RWG

III. Compliance Dates

IV. Economic Analysis

A. Introduction

B. Economic Baseline

1. Description of Market

2. Overview of the Existing Regulatory

Framework


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Federal Register / Vol. 88, No. 232 / Tuesday, December 5, 2023 / Rules and Regulations 84455 

2Release No. 34–95431 (Aug. 8, 2022), 87 FR 

51812, 51813 (Aug. 23, 2022) (‘‘Governance 

Proposing Release’’). 

3Public Law 111–203, 124 Stat. 1376 (2010). 

4See, e.g., 17 CFR 240.17Ad–22 (‘‘Rule 17Ad– 

22’’); see also Release No. 34–88616 (Apr. 9, 2020), 

85 FR 28853, 28855 (May 14, 2020) (‘‘CCA 

Definition Adopting Release’’); Release No. 34– 

78961 (Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016) 

(‘‘CCA Standards Adopting Release’’); Release No. 

34–68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 

2012) (‘‘Clearing Agency Standards Adopting 

Release’’). 

5 Governance Proposing Release, supra note 2, at 

51814. 

6 Id. at 51814–51819. 

7 Id. at 51814 (describing the same as ‘‘clearing 

members and the larger financial community’’). 

8 Id. 

9 Id. 

10The Commission voted to issue the Governance 

Proposing Release on August 8, 2022. The release 

was posted on the Commission website that day, 

and comment letters were received beginning the 

following day. The comment period closed on 

October 7, 2022. Comments received are available 

on the Commission’s website at https://

www.sec.gov/comments/s7-21-22/s72122.htm. The 

Commission has considered all comments received 

since August 8, 2022. 

11See Governance Requirements for Derivatives 

Clearing Organizations, Final Rule, 88 FR 44675 

(July 13, 2023). 

12Public Law 111–203, 124 Stat. 1376 (2010). 

13See Governance Proposing Release, supra note 

2, at 51819 & n.49 (stating ‘‘the targeted set of 

proposed rules for governance included in this 

release can help ensure that the framework 

effectively addresses the considerations set forth in 

Section 765 with respect to clearing of securitybased swaps. Although Section 765 directed the 

Commission to focus on conflicts of interest 

specifically with respect to security-based swap 

clearing agencies, the Commission believes that 

conflicts of interest concerns can arise across all 

registered clearing agencies regardless of the asset 

classes served.’’). 

3. Divergent Incentives of Registered

Clearing Agency Stakeholders

4. Current Governance Practices

C. Consideration of Benefits and Costs as

Well as the Effects on Efficiency,

Competition, and Capital Formation

1. Economic Considerations for Final Rule

Regarding Board Composition

2. Economic Considerations for Final Rules

Regarding the Nominating Committee

3. Economic Considerations for Final Rules

Regarding the Risk Management

Committee

4. Economic Considerations for Final Rules

Regarding Conflicts of Interest Involving

Directors or Senior Managers

5. Economic Considerations for Final Rules

Regarding Management of Risks From

Relationships With Service Providers for

Core Services

6. Economic Considerations for Final Rules

Regarding Formalized Solicitation,

Consideration, and Documentation of

Stakeholders’ Viewpoints

D. Reasonable Alternatives to the Final

Rules

1. Allow More Flexibility in Governance,

Operations, and Risk Management

2. Adopt More Prescriptive Governance

Requirements

3. Establish Limits on Participant Voting

Interests

4. Increase Shareholders’ At-Risk Capital

(‘‘Skin in the Game’’)

5. Increase Public Disclosure

6. Require Risk Working Group in Addition

to Risk Committee 

V. Paperwork Reduction Act

A. Rule 17Ad–25(b)

B. Rule 17Ad–25(c)

C. Rule 17Ad–25(d)

D. Rule 17Ad–25(g)

E. Rule 17Ad–25(h)

F. Rule 17Ad–25(i)

G. Rule 17Ad–25(j)

H. Chart of Total PRA Burdens

VI. Regulatory Flexibility Act

A. Registered Clearing Agencies

B. Certification

VII. Other Matters

Statutory Authority

I. Introduction

Clear and transparent governance

arrangements are integral to ensuring 

that a clearing agency is resilient 

because, among other things, such 

arrangements promote accountability 

and reliability in decision-making.2

Since the enactment of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’) in 

2010,3 the Commission has adopted a 

series of rules intended to promote the 

resilience of registered clearing 

agencies,4 with the goal of establishing 

an evolving regulatory framework.5 As 

discussed in greater detail in the 

Governance Proposing Release,6 the 

Commission has continued to observe 

and learn from the recurring tensions 

that exist in the incentive structure of a 

clearing agency, including their 

potential effect on the participants of 

the clearing agency and the broader 

financial system.7 Accordingly, the 

Governance Proposing Release included 

new rules designed to help ensure that 

a registered clearing agency can 

effectively balance the differing 

incentives that exist among the clearing 

agency, its participants, and other key 

stakeholders.8 The proposed rules 

included more specific and defined 

parameters and requirements for 

governance intended to build upon and 

strengthen the existing requirements in 

Rule 17Ad–22 that have a broader and 

principles-based focus.9

The Commission received comments 

on the Governance Proposing Release 

from registered clearing agencies, 

participants of registered clearing 

agencies and their customers, industry 

groups representing clearing agencies, 

their participants, and other market 

participants, academics, individual 

investors, and other interested parties.10

Many commenters were supportive of 

the proposed rules, though some 

commenters also expressed concerns 

regarding specific elements of certain 

rules. In Part II below, the Commission 

discusses these comments in detail and 

modifications made in response to the 

comments. In addition, the Commodity 

Futures Trading Commission (‘‘CFTC’’) 

recently adopted new requirements 

applicable to risk management 

committees (‘‘RMCs’’) and risk working 

groups (‘‘RWGs’’) of derivatives clearing 

organizations (‘‘DCOs’’),11 topics which 

are also addressed in the context of 

registered clearing agencies by the 

Commission’s final rules discussed 

below. The Commission’s final rules 

promote similar outcomes as the CFTC’s 

rules, such as ensuring robust board 

oversight of senior management, and 

informing the board of stakeholder 

views, though in some cases the 

Commission has taken a different 

approach as to specific requirements 

because Rule 17Ad–25 also addresses 

additional topics, including board 

composition, director independence, 

and conflicts of interest. The differing 

approaches are explained further in 

Parts II.C.4 and II.F.7. Finally, these 

rules are being adopted pursuant to 

section 765 of the Dodd-Frank Act with 

respect to clearing of security-based 

swaps,12 which specifically directs the 

Commission to adopt rules to mitigate 

conflicts of interest for security-based 

swap clearing agencies.13

II. Discussion of Comments Received

and Final Rules

A. Board Composition and

Requirements for Independent Directors

1. Proposed Rules 17Ad–25(b), (e), and

(f)

Proposed Rules 17Ad–25(b), (e), and 

(f) would establish requirements related

to independent directors serving on the

board of a registered clearing agency.

First, proposed Rule 17Ad–25(b)(1)

would require that a majority of the

directors be independent directors, as

defined in proposed Rule 17Ad–25(a).

The proposed rule would also provide

that, if a majority of the voting interests

issued as of the immediately prior

record date are directly or indirectly

held by participants of the registered

clearing agency, then at least 34 percent

of directors must be independent

directors. Proposed Rule 17Ad–25(a)

would define an ‘‘independent director’’

to mean a director that has no material

relationship with the registered clearing

agency, or any affiliate thereof.

Proposed Rule 17Ad–25(a) also would

define ‘‘material relationship’’ to mean

a relationship, whether compensatory or

otherwise, that reasonably could affect

the independent judgment or decisionVerDate Sep<11>2014 17:09 Dec 04, 2023 Jkt 262001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\05DER3.SGM 05DER3

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84456 Federal Register / Vol. 88, No. 232 / Tuesday, December 5, 2023 / Rules and Regulations 

making of the director, and includes 

relationships that existed during a 

lookback period of one year counting 

back from making the initial 

independence determination made in 

accordance with proposed Rule 17Ad– 

25(b)(2). In addition, proposed Rule 

17Ad–25(a) would define ‘‘affiliate’’ to 

mean a person that directly or indirectly 

controls, is controlled by, or is under 

common control with the registered 

clearing agency. Proposed Rule 17Ad– 

25(b)(2) would require that a registered 

clearing agency broadly consider all the 

relevant facts and circumstances, 

including under proposed Rule 17Ad– 

25(g), on an ongoing basis, to 

affirmatively determine that a director 

does not have a material relationship 

with the registered clearing agency or an 

affiliate of the registered clearing 

agency, and is not precluded from being 

an independent director under proposed 

Rule 17Ad–25(f), in order to qualify as 

an independent director. In making 

such determination, a registered 

clearing agency must: (i) identify the 

relationships between a director, the 

registered clearing agency, and any 

affiliate thereof, along with the 

circumstances set forth in proposed 

Rule 17Ad–25(f); (ii) evaluate whether 

any relationship is likely to impair the 

independence of the director in 

performing the duties of director; and 

(iii) document this determination in

writing. Such documentation

requirements would be subject to the

recordkeeping and retention

requirements that apply to all selfregulatory organizations (‘‘SROs’’) under

Exchange Act section 17(a)(2) and rules

thereunder.

Proposed Rule 17Ad–25(e) would 

require that, if any committee has the 

authority to act on behalf of the board, 

the composition of that committee must 

have at least the same percentage of 

independent directors as is required 

under these rules for the board, as set 

forth in proposed paragraph (b)(1). 

Proposed Rule 17Ad–25(f) would 

describe certain circumstances that 

would always exclude a director from 

being an independent director. These 

circumstances would include: (1) the 

director is subject to rules, policies, and 

procedures by the registered clearing 

agency that may undermine the 

director’s ability to operate unimpeded, 

such as removal by less than a majority 

vote of shares that are entitled to vote 

in such director’s election; (2) the 

director, or a family member, has an 

employment relationship with or 

otherwise receives compensation, other 

than as a director, from the registered 

clearing agency or any affiliate thereof, 

or the holder of a controlling voting 

interest of the registered clearing 

agency; (3) the director, or a family 

member, is receiving payments from the 

registered clearing agency, or any 

affiliate thereof, or the holder of a 

controlling voting interest of the 

registered clearing agency that 

reasonably could affect the independent 

judgment or decision-making of the 

director, other than the following: (i) 

compensation for services as a director 

to the board or a committee thereof; or 

(ii) pension and other forms of deferred

compensation for prior services not

contingent on continued service; (4) the

director, or a family member, is a

partner in, or controlling shareholder of,

any organization to or from which the

registered clearing agency, or any

affiliate thereof, or the holder of a

controlling voting interest of the

registered clearing agency, is making or

receiving payments for property or

service, other than the following: (i)

payments arising solely from

investments in the securities of the

registered clearing agency, or affiliate

thereof; or (ii) payments under nondiscretionary charitable contribution

matching programs; (5) the director, or

a family member is employed as an

executive officer of another entity where

any executive officers of the registered

clearing agency serve on that entity’s

compensation committee; or (6) the

director, or a family member, is a

partner of the outside auditor of the

registered clearing agency, or any

affiliate thereof, or an employee of the

outside auditor who is working on the

audit of the registered clearing agency,

or any affiliate thereof. Proposed Rules

17Ad–25(f)(2) through (6) would be

subject to a lookback period of one year,

counting back from making the initial

determination required by proposed

Rule 17Ad–25(b)(2).

Proposed Rule 17Ad–25(a) would 

define ‘‘family member’’ to include any 

child, stepchild, grandchild, parent, 

stepparent, grandparent, spouse, sibling, 

niece, nephew, mother-in-law, father-inlaw, son-in-law, daughter-in-law, 

brother-in-law, or sister-in-law, 

including adoptive relationships, any 

person (other than a tenant or employee) 

sharing a household with the director or 

a nominee for director, a trust in which 

these persons (or the director or a 

nominee for director) have more than 

fifty percent of the beneficial interest, a 

foundation in which these persons (or 

the director or a nominee for director) 

control the management of assets, and 

any other entity in which these persons 

(or the director or a nominee for 

director) own more than fifty percent of 

the voting interests. 

The Commission is adopting Rules 

17Ad–25(b), (e), and (f) generally as 

proposed but with technical changes to 

Rule 17Ad–25(a), Rule 17Ad–25(b)(1), 

Rule 17Ad–25(b)(2), Rule 17Ad– 

25(b)(2)(i), and Rule 17Ad–25(b)(2)(iii), 

for the reasons discussed below. In 

making the technical change to the 

definition of ‘‘material relationship’’ in 

Rule 17Ad–25(a), the Commission is 

embedding the reference to a lookback 

period that was proposed in a 

standalone sentence into the initial 

sentence relating to relationships that 

could affect the independent judgment 

or decision-making of a director, in 

order to clarify that the lookback period 

is part of the overall reference to these 

relationships. In making the technical 

change to Rule 17Ad–25(b)(1), the 

Commission is replacing the term 

‘‘voting rights’’ with ‘‘voting interests,’’ 

which would be consistent with the 

terms used elsewhere in the rule text, 

and which remains consistent with the 

concept as proposed. In making the 

technical change to Rule 17Ad–25(b)(2), 

the Commission is deleting the last 

proviso that stated, ‘‘in order to qualify 

as an independent director,’’ because 

this reference is unnecessary and does 

not describe all of the requirements for 

qualifying as an independent director. 

In making the technical change to Rule 

17Ad–25(b)(2)(i), the Commission is 

reordering the language requiring 

identification of the relationships 

between a director and a registered 

clearing agency, and a director and any 

affiliate of a registered clearing agency. 

The proposed rule text implied that 

there needed to be identification of 

relationships between the registered 

clearing agency and its affiliates, which 

is not intended. In making the technical 

change to Rule 17Ad–25(b)(2)(iii), the 

Commission is specifying that the 

documentation requirement applies to 

both the registered clearing agency’s 

evaluation of director independence 

and its ultimate determination (i.e., 

whether the director qualifies as an 

independent director or is not an 

independent director). Under the 

proposed text, the phrase ‘‘this 

determination’’ was intended to 

encompass broad consideration of all 

the relevant facts and circumstances on 

an ongoing basis. The Commission is 

modifying the text in adopted Rule 

17Ad–25(b)(2)(iii) to be ‘‘the evaluation 

and determination’’ to specify that the 

documentation requirement applies to 

both the evaluation of independence 

and the ultimate determination 

regarding independence. 

In the Governance Proposing Release, 

the Commission stated that an 


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Federal Register / Vol. 88, No. 232 / Tuesday, December 5, 2023 / Rules and Regulations 84457 

14See Governance Proposing Release, supra note 

2, at 51821. 

15See id. at 51819; see also id. at 51812 n.3 

(explaining that examples of indirect participants 

are customers or clients of direct participants or 

clearing members since they rely on services 

provided by a direct participant to access the 

services of the clearing agency). 

16See id. at 51844. 

17See id. at 51822. 

18See id. 

19See id. at 51823. 20See, e.g., Timothy Washington (Aug. 12, 2022) 

(‘‘Washington’’); Andres Loubriel (Aug. 12, 2022) 

(‘‘Loubriel’’); Gerald (Aug. 12, 2022) (‘‘Gerald’’); 

Dylan Crosby (Aug. 12, 2022) (‘‘Crosby’’); 

Anonymous (Aug. 12, 2022) (‘‘Anonymous 1’’); Josh 

Zimmerman (Aug. 12, 2022) (‘‘Zimmerman’’); 

Nathan Rohde (Aug. 13, 2022) (‘‘Rohde’’); Ian 

Marshall (Aug. 17, 2022) (‘‘Marshall’’); Anonymous 

(Aug. 26, 2022) (‘‘Anonymous 4’’); Harun Krishnan 

(Aug. 26, 2022) (‘‘Krishnan’’); Matthew Fry (Aug. 

26, 2022) (‘‘Fry’’); the Delois Albert Brassell Estate 

(Sept. 3, 2022) (‘‘Delois Albert Brassell Estate’’); 

Kaleab Tesema (Sept. 7, 2022) (‘‘Tesema’’); Jamario 

(Oct. 6, 2022) (‘‘Jamario’’); Ben Passlow (May 11, 

2023) (‘‘Passlow’’) (each expressing views in 

support); see also Val Ayrapetov (Aug. 9, 2022) 

(‘‘Ayrapetov’’); George (Aug. 12, 2022) (‘‘George’’); 

Anonymous (Aug. 12, 2022) (‘‘Anonymous 2’’); 

M.B. (Oct. 6, 2022) (‘‘M.B.’’) (requesting creation of 

a retail-specific board member) (each expressing 

views against). 

21See, e.g., Crosby, Loubriel; Zimmerman. 22See Anonymous 1; Christopher Hewitt (Aug. 

12, 2022) (‘‘Hewitt’’); Mason Smith (Aug. 12, 2022) 

(‘‘Smith’’); Samuel Ryan (Aug. 12, 2022) (‘‘Ryan’’); 

Keith Clark (Aug. 12, 2022) (‘‘Clark’’); Dillon (Aug. 

12, 2022) (‘‘Dillon’’); Evan (Aug. 12, 2022) (‘‘Evan 

Letter’’); John J. Kozubal (Oct. 6, 2022) (‘‘Kozubal’’); 

James Fox (Oct. 6, 2022) (‘‘Fox’’); Joe (Oct. 7, 2022) 

(‘‘Joe’’); Anonymous (Oct. 12, 2022) (‘‘Anonymous 

5’’); Anonymous (Oct. 13, 2022) (‘‘Anonymous 6’’); 

Kens Bane (Jan. 16, 2023) (‘‘Bane’’). 

23See 15 U.S.C. 78c(a)(23), (26). 

24See Thomas Price, Managing Director, 

Operations/Technology, Robert Toomey, Managing 

Director, Associate General Counsel, Head of 

Capital Markets, Joseph Corcoran, Managing 

Director, Associate General Counsel, Securities 

Industry and Financial Markets Association (Oct. 

28, 2022) (‘‘SIFMA’’) at 2. 

25See Chris Barnard (Sept. 9, 2022) (‘‘Barnard’’); 

Stephen W. Hall, Legal Director and Securities 

Specialist, and Houston Shaner, Senior Counsel, 

Better Markets, Inc. (Oct. 7, 2022) (‘‘Better 

Markets’’) at 5; Murray Pozmanter, Managing 

Director, President, Clearing Agency Services & 

Head of Global Business Operations, Depository 

Trust & Clearing Corporation (Oct. 7, 2022) 

(‘‘DTCC’’) at 2. 

26William C. Thum, Managing Director and 

Assistant General Counsel, SIFMA Asset 

Management Group (Oct. 13, 2022) (‘‘SIFMA 

AMG’’) at 8. 

27Ulrich Karl, Head of Clearing, International 

Swaps and Derivatives Association, Inc. (Oct. 28, 

2022) (‘‘ISDA’’) at 6. 

28Paolo Saguato, Assistant Professor of Law, 

George Mason University Antonin Scalia Law 

School (Oct. 6, 2022) (‘‘Saguato’’) at 3. 

independent director can bolster a 

board’s ability to perform effectively by 

reducing the potential for financial or 

other relationships between directors 

and those persons who are overseen by 

directors, such as management.14 Even 

the appearance of conflicts of interest 

can reduce confidence in the 

functioning of the registered clearing 

agency among direct and indirect 

participants of the registered clearing 

agency, other stakeholders, and the 

public, particularly during periods of 

market stress when general confidence 

in market resilience may be low.15

Indeed, as discussed in the Governance 

Proposing Release, each of the registered 

clearing agencies already requires a 

portion of their directors to have some 

characteristics of independence 

(establishing, for example, 

‘‘nonexecutive’’ or ‘‘public’’ directors).16

Further, the structure of a registered 

clearing agency and the risk 

management tools that it employs affect 

how the interests of owners, 

participants, and other types of 

stakeholders align. For example, as 

discussed in the Governance Proposing 

Release, the risk mutualizing and trade 

guaranty features provided by many 

registered clearing agencies provide for 

the shift of the consequences of one 

party’s actions to another in certain 

circumstances, such as after a 

participant default.17 These features 

both affect how different stakeholders 

maximize their own self-interest and 

also distinguish the governance of a 

registered clearing agency from other 

corporate entities. The Commission 

stated its belief that registered clearing 

agency processes involving risk 

management or director nominations are 

also implicated in managing the 

dynamics between owners and 

participants.18 The ability of a registered 

clearing agency to help ensure effective 

risk management and loss allocation in 

the event of a default or non-default loss 

is linked to the interests of the owners 

of the clearing agency, who may also 

have financial relationships with the 

participants (or be the participants) of 

such registered clearing agency. The 

Commission stated its belief that 

requiring a certain percentage of 

independent directors helps promote 

the ability of the board to perform its 

oversight of management function and 

to support a plurality of viewpoints 

voiced at the board level.19 Independent 

directors would help ensure that, when 

the interests between owners and 

participants diverge, the balancing of 

interests is more manageable because 

the board would not be composed 

entirely of directors who have material 

relationships either to management 

(such as under a situation where 

managers approve payments from the 

registered clearing agency to such 

director), owners, or participants of the 

registered clearing agency. Achieving 

balance between stakeholders with 

divergent views could help the board 

adequately consider the respective 

needs of all such stakeholders and help 

promote the integrity of, and public 

confidence in, the registered clearing 

agency’s risk management function. 

Comments on the proposed board 

composition requirements and 

requirements for independent directors 

are discussed below. 

2. Overall Views

Of the comments received on the

Governance Proposing Release, the 

majority were from individuals. Several 

expressed high-level views either in 

support or against the proposal,20

referencing, for example, their concerns 

that retail investors are being cheated 

due to clearing agency greed or conflicts 

of interest, or requesting retail investor 

representation on the board. Several 

commenters were specifically 

concerned with incidents of failures to 

deliver with their transactions, but did 

not discuss the rule proposals in the 

Governance Proposing Release.21 Many 

commenters were under the mistaken 

impression that the proposal would 

alter the status of certain entities as 

SROs.22 However, the Exchange Act 

clearly defines registered clearing 

agencies as SROs,23 and the proposed 

rule would have no impact on this 

status. As a general matter, the concerns 

expressed by these commenters 

regarding the perception of conflicts of 

interest at a registered clearing agency 

highlight the need to adopt Rule 17Ad– 

25, including the provisions for 

independent directors and to address 

conflicts of interest, to promote 

confidence in registered clearing agency 

governance through requirements 

intended to ensure transparency, fair 

representation, and effective decisionmaking at the board level. 

Several comments from 

representatives of trade groups or 

registered clearing agencies expressed 

general support for having an 

independent director requirement as a 

‘‘good first step,’’ 24 appropriately 

designed to reduce the risk of conflicts 

of interest 25 and provide diverse 

viewpoints 26 in a ‘‘pragmatic’’ 27 way. 

One commenter supported the 

independent director requirement 

because it was consistent with public 

company listing rules and would be 

particularly useful in capturing a range 

of perspectives when combined with the 

requirement of a nominating committee 

to consider a broad range of views.28

Another commenter viewed the 

requirements as consistent with 

independent director requirements that 

were already incorporated into its 


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29 Kara Dutta, Assistant General Counsel, 

Intercontinental Exchange, Inc. (Nov. 11, 2022) 

(‘‘ICE’’) at 2. 

30See Frank Baldi, Managing Director, Head of 

Financial Institutions and Emerging Markets Credit 

Risk, Barclays, et al. (Oct. 18, 2022) (‘‘Barclays et 

al.’’) at 1. 

31 ISDA at 6. 

32 ICE at 2–3. 

33See 15 U.S.C. 78q–1(b)(3)(c). 

34 Global Association of Central Counterparties 

(Oct. 7, 2022) (‘‘CCP12’’) at 1; see also SIFMA at 3; 

ICE at 3. 

35See Governance Proposing Release, supra note 

2, at 51821. 

36See id. at 51824 (‘‘Establishing a materiality 

and reasonableness threshold for such relationships 

provides a registered clearing agency with 

discretion to apply this requirement across a range 

of fact patterns while ensuring that they ultimately 

facilitate the fair representation of owners and 

participants.’’). 

37 Joseph P. Kamnik, Senior Special Advisor and 

Regulatory Counsel, Options Clearing Corporation 

(Oct. 7, 2022) (‘‘OCC’’) at 23. 

38CCP12 at 3. 

39SIFMA AMG at 8. 

40Better Markets at 13. 

governance structure.29 Another group 

of commenters supported the 

independent director requirement 

because it was consistent with a 

whitepaper issued by the group in 2019 

concerning the need for enhanced 

governance at clearing agencies to 

address their risk-related concerns.30

One commenter cautioned against 

‘‘completely’’ independent directors 

(i.e., independent from owners and 

participants, such as academics) 

creating a situation where clearing 

agency participants could be underrepresented.31 As discussed further 

below, the Exchange Act requires that 

the rules of the clearing agency assure 

a fair representation of its shareholders 

and participants in the selection of its 

directors and administration of its 

affairs. Another commenter that 

supported the proposed requirements 

cautioned against going any further than 

the proposal—such as by requiring 

certain types of stakeholders to be 

represented—stating that a board’s 

effectiveness comes from the skills, 

personal attributes (including 

leadership and integrity), and relevant 

business and risk management 

experience of its directors, and not 

simply by drawing directors from 

various stakeholder groups.32 As 

discussed further below, Rules 17Ad– 

25(b) and (e) address the composition of 

the board and board committees, and 

does not go further to address the 

composition of an advisory group (the 

constitution of which can serve a wider 

set of stakeholders because its members 

need not already be serving on the board 

to serve on such an advisory group). 

Exchange Act section 17A(b)(3)(c) 

directs the Commission to only register 

clearing agencies whose rules assure a 

fair representation of participants in, 

among other things, the selection of 

directors.33 In terms of the skills and 

effectiveness of a board, other 

requirements of Rule 17Ad–25 help 

promote highly qualified and effective 

candidates serving as independent 

directors. For example, as discussed in 

Part II.B below, Rule 17Ad–25(c) as 

adopted requires policies and 

procedures for a registered clearing 

agency’s nominating committee to have 

a written process for evaluating 

directors and nominees for director, 

including taking into account each 

nominee’s expertise, availability, and 

integrity, and demonstrating that the 

board of directors, taken as a whole, has 

a diversity of skills, knowledge, 

experience, and perspectives. 

Another commenter did not see the 

problem that the proposed rules would 

solve, indicating the group’s belief that 

the approach to board composition and 

board independence was too 

prescriptive, which could prevent a 

registered clearing agency from having 

governance measures that are uniquely 

suited to manage risks particular to the 

registered clearing agency.34 As stated 

in the Governance Proposing Release, 

the requirements regarding the 

representation of independent directors 

are appropriate to facilitate the 

consideration and management of 

diverse stakeholder interests by the 

board in the overall decision-making 

process of the registered clearing 

agency.35 Regarding the level of 

prescriptiveness, Rule 17Ad–25(f) 

identifies situations that, in the 

Commission’s judgment, create material 

relationships with the registered 

clearing agency that are incompatible 

with being an independent director but, 

other than these specific exclusions, 

registered clearing agencies would have 

discretion to evaluate whether a 

director’s relationships to the registered 

clearing agency are material. Because 

Rule 17Ad–25 provides registered 

clearing agencies with such discretion, 

the Commission set forth the list of 

specific exclusions in Rule 17Ad–25(f) 

to ensure a consistent, minimum 

standard for independent directors 

across registered clearing agencies.36

Therefore, the Commission disagrees 

that the rules are overly prescriptive 

because of the levels of discretion that 

are allowed, and disagrees that unique 

governance measures could not be 

adopted by registered clearing agencies. 

3. Criteria for Independence

One commenter supported the

requirement for establishing an overall 

level of independent directors at 34 

percent for participant-owned registered 

clearing agencies as being sufficient and 

without the drawbacks of too many 

independent directors.37 Another 

commenter disagreed with the proposal, 

stating that the Commission should not 

impose any percentage of independent 

directors given the differences in 

organizational structure, markets, and 

products cleared, among other things, 

across registered clearing agencies.38 A 

separate commenter supported the 

requirement for independent directors 

because it would mitigate potential 

conflicts and also provide better board 

oversight of the registered clearing 

agency’s risk management and other 

functions.39 The proposed requirements 

for the percentage of independent 

directors strike a reasonable balance 

between the competing interests of 

management, owners, participants, and 

any parties falling into more than one of 

those categories. In the Governance 

Proposing Release, the Commission 

considered whether a clearing agency’s 

particular organizational structures, 

markets served, or products cleared 

support differing minimum levels of 

independence, and stated that the 

percentage of participant ownership of 

the clearing agency is an important 

factor against which to set the minimum 

standard for director independence. 

Commenters have not identified another 

specific factor that would support 

modifying the proposed threshold. 

Further, Rule 17Ad–25 does not impede 

registered clearing agencies from 

considering a broad pool of potential 

candidates to serve as independent 

directors, to appropriately reflect their 

different organizational structures, 

markets served, and products cleared. 

Therefore, the Commission is adopting 

the percentages as proposed. 

One commenter supported aspects of 

the ‘‘independent director’’ definition 

but stated that the proposed 

requirement that a majority of directors 

be independent is unlikely to resolve all 

conflicts of interest because registered 

clearing agency owners will still have 

ultimate approval of, and influence 

over, independent directors. The 

commenter also explained that 

independent directors still have 

fiduciary duties to the registered 

clearing agency and are constrained to 

act in service of shareholder value when 

reviewing risk priorities.40 The value of 

a particular element of Rule 17Ad–25 is 

not diminished even though it does not 

address all potential conflicts of 

interest. Rule 17Ad–25 is intended to 


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41 Id. at 12. 

42 Id. at 18–19. 

43See infra Part II.D.2 (similarly addressing 

comments with respect to the ‘‘reasonableness’’ 

requirement in Rule 17Ad–25(g)). 

44Better Markets at 20. 

45See, e.g., Disclosure of Certain Relationships 

and Transactions Involving Management, Securities 

Act Release No. 6441, Exchange Act Release 

No.19290, Investment Company Act No. 12865 

(Dec. 2, 1982), 47 FR 55661, 55663 (Dec. 14, 1982) 

(discussing whether to apply a rule to a class of 

relatives that is broader than those who live in a 

household with a reporting person, because there is 

not complete overlap between the two categories. 

The Commission considered whether to apply the 

rule to relatives who could take advantage of 

financial transactions with a reporting person 

without living in that reporting person’s household. 

As a corollary, some members of a household may 

not be relatives either, but both categories were 

contemplated as a proxy for the existence of close 

ties between two people). 

46OCC at 6. 

47CCP12 at 3. 

48Specifically, Rule 17Ad–25(f)(4) applies to 

directors who are partners or controlling 

shareholders of any organization to or from which 

the registered clearing agency is making or 

receiving payments, which would include clearing 

fee payments made by a participant as a clearing 

member. 

bolster the overall quality of governance 

(and therefore risk management) at a 

registered clearing agency. The same 

commenter also requested clarification 

that material relationship would include 

director compensation that is tied to 

registered clearing agency equity, 

revenue, volume, or scope of 

products.41 While Rule 17Ad–25(f) 

identifies specific circumstances that 

establish a material relationship, the 

definition of ‘‘material relationship’’ in 

Rule 17Ad–25(a) is broad. 

Circumstances where director 

compensation includes elements that 

generate potential conflicts of interest, 

such as those tying monetary 

compensation to equity, revenue, 

volume of activity, or scope of products, 

generally could create a material 

relationship under Rule 17Ad–25(a). 

The same commenter also suggested 

that the definition of ‘‘material 

relationship’’ be modified to include 

any interests that create a reasonable 

appearance of clouding the judgment of 

a director, on the basis that even the 

appearance of a bias erodes trust.42

Trust is important, especially during 

times of market stress, but the proposed 

definition does not need to be modified 

to address this concern. The definition 

of ‘‘material relationship’’ already 

contains a ‘‘reasonableness’’ element, 

requiring that such relationships be 

assessed as they would be perceived by 

a reasonable person, which would allow 

a clearing agency to consider and 

address relationships that create the 

appearance of a conflict. This 

reasonableness requirement applies 

even to relationships or situations that 

are otherwise not among the exclusions 

in Rule 17Ad–25(f), because Rule 17Ad– 

25(f) applies in addition to how the 

definition of independent director is 

applied by a registered clearing agency. 

In this regard, clearing agencies 

generally should consider this 

reasonableness element in the context of 

participants, vendors, or non-controlling 

shareholders of the clearing agency or 

its affiliates. Employees of participants 

may be subject to disqualification under 

this reasonableness requirement, even if 

they are not subject to disqualification 

under Rule 17Ad–25(f). The 

reasonableness element would apply to 

an evaluation of the qualifications 

necessary for being an independent 

director, which will be contingent on 

the broad set of facts and circumstances 

under consideration. The definition also 

includes relationships that reasonably 

could affect the independent judgment 

or decision-making of the director, 

which seeks to address outcomes that 

reasonably could happen, even if they 

have not yet in fact happened. 

Therefore, the Commission is not 

modifying the rule in response to this 

comment.43

The commenter further suggested 

expanding the definition of ‘‘family 

member’’ to include first cousins.44 The 

Commission considered this expansion, 

and also reviewed prior Commission 

rationales on the appropriate scope of 

‘‘family member’’ definitions under 

other Commission rules.45 In those prior 

rulemakings, the Commission 

concluded that the scope of family 

members included there (which is 

identical to the scope proposed in the 

Governance Proposing Release) provides 

adequate coverage to address regulatory 

interests because any close ties between 

a director and a relative that are not 

already within the definition of ‘‘family 

member’’ (such as cousins of various 

degrees) can be addressed by using the 

other provision that applies to all 

persons who share a household with the 

director, as a proxy for such close ties 

rather than serving as a generalized 

proxy for a particular category of 

relatives. Moreover, the exclusions that 

relate to family member activities in 

Rule 17Ad–25(f) are designed to be a 

floor, not a ceiling, meaning that other 

fact patterns may preclude a director 

from meeting the independence 

requirement pursuant to the general 

requirements in Rule 17Ad–25(b) 

instead of a specific exclusion in Rule 

17Ad–25(f). 

One commenter stated that many of 

the prohibitions in Rule 17Ad–25(f)(4) 

were ‘‘overbroad’’ and that not all 

payments from participants should 

preclude an independence 

determination; rather, in the 

commenter’s view, Rule 17Ad–25(f)(4) 

should include a de minimis threshold 

and an exemption for the payment of 

clearing fees.46 The commenter stated 

that, in the absence of a de minimis 

threshold, the rule could exclude 

registered clearing agency participants 

that are only receiving a nominal sum 

for a small service provided to the 

registered clearing agency. The 

commenter further stated that clearing 

fees are a relatively inconsequential 

component of market participants’ cost 

of business, and it is unlikely that a 

director could reduce clearing fees 

without oversight because clearing fee 

changes must be filed with the 

Commission. In particular, the 

commenter stated that its fee refunds 

should not be covered by this exclusion 

(which the Commission understands to 

apply when accrued clearing fees 

exceed the registered clearing agency’s 

targeted capital amount, so refunding an 

overpayment does not implicate the 

same potential conflict as does receiving 

a payment). Another commenter stated 

that, in the absence of a de minimis 

threshold, the rule could exclude 

candidates for independent director 

who are only receiving de minimis 

payments or remuneration or clearing 

fees.47

The exclusion in Rule 17Ad–25(f)(4) 

would apply to directors who are 

partners or controlling shareholders of a 

registered clearing agency participant.48

The scope of this exclusion is narrow, 

however; employees, managers, and 

non-controlling shareholders of a 

participant could still qualify, allowing 

for a broad range of potential candidates 

who have experience with the 

participant’s business. Additionally, 

although the payments received or made 

between, for example, a participant and 

a registered clearing agency may be 

inconsequentially small from the 

perspective of the registered clearing 

agency or the participant as a business 

entity, that same payment may be 

meaningful to an individual who is a 

director and who is a controlling 

shareholder of the participant. For 

example, that individual’s equity stake 

in the participant may result in extra 

personal income for every dollar saved 

or earned. Due to the potential for 

personal enrichment, the Commission is 

not adopting a de minimis amount of 

payments that would allow a 

participant’s controlling shareholder to 

serve as an independent director. 

Because the Commission is not 

incorporating any de minimis carve out, 


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49OCC at 7. 50SIFMA AMG at 8. 51Sarah A. Bessin, Associate General Counsel, 

and Nhan Nguyen, Assistant General Counsel, 

Investment Company Institute (Oct. 7, 2022) (‘‘ICI’’) 

at 7. 

52See infra Parts II.B.3 (discussing the 

requirements in Rule 17Ad–25(c)(4)(ii) for the 

nominating committee to demonstrate that it has 

considered whether a particular nominee would 

complement the other board members, such that, if 

elected, the board, taken as a whole, would 

represent the views of the owners and participants, 

including a selection of directors that reflects the 

range of different business strategies, models, and 

sizes across participants, as well as the range of 

customers and clients the participants serve) and 

II.F (discussing the requirements in Rule 17Ad– 

25(j) to solicit, consider, and document stakeholder 

viewpoints). 

53Claire O’Dea, Director, Government Relations 

and Regulatory Strategy, Americas, London Stock 

Exchange Group (Oct. 7, 2022) (‘‘LSEG’’) at 3–4. 

54 Id. at 4. 55See infra Part II.B.2 (further discussing the 

purview of the nominating committee and the 

comment regarding ‘‘control’’). 56See Regulation (EU) No 648/2012 of the 

European Parliament and of the Council of 4 July 

2012 on OTC derivatives, central counterparties and 

trade repositories, as amended, https://eurlex.europa.eu/legal-content/EN/TXT/?uri=CELEX:

02012R0648-20200101. 57LSEG at 3. 58 Id. 

it is not addressing how to calculate 

such de minimis amount. Accordingly, 

the Commission also is not addressing 

whether fee refunds should be included 

in calculations to establish a de minimis 

amount of such payments. Nonetheless, 

and regardless of the circumstances, 

such controlling shareholder of a 

participant could still serve on the 

board as a non-independent director. 

A commenter also suggested, as an 

alternative to explicitly carving out 

payments for clearing fees from the 

exclusion in Rule 17Ad–25(f)(4), that 

the Commission specify that the term 

‘‘partner’’ therein only refers to someone 

who has an equity ownership stake in 

the organization.49 The term ‘‘partner,’’ 

as used in Rule 17Ad–25(f)(4) as 

adopted, refers to those with an equity 

ownership stake in an organization such 

as an limited partnership or limited 

liability partnership and does not 

include any person who simply has the 

term ‘‘partner’’ in her job title without 

also holding an equity ownership stake 

in the organization that is sending or 

receiving payments to or from a 

registered clearing agency, an affiliate 

thereof, or a holder of a controlling 

voting interest of the registered clearing 

agency. 

One commenter suggested that the 

Commission require board 

representation by customers of 

registered clearing agency participants 

because such customers are bound to 

registered clearing agency obligations 

that are theoretically uncapped, bear 

mutualized risk, and could provide 

unique perspectives on risk 

management issues.50 Another 

commenter requested that the 

Commission add a requirement for 

registered clearing agency boards to 

have representatives from customers of 

registered clearing agency participants, 

such as buy-side market participants, 

due to their understanding of the risks 

and impacts of registered clearing 

agency decisions on a wide variety of 

such market participants and their 

clients.51

In considering the application of the 

rule, it is important to distinguish the 

contractual obligations and liabilities 

that exist between registered clearing 

agency participants and the registered 

clearing agency itself on the one hand, 

and between registered clearing agency 

participants and their own customers on 

the other. The Commission does not 

agree that customers of registered 

clearing agency participants are bound 

to the clearing agency for uncapped 

obligations. Customers of registered 

clearing agency participants do face 

contractual performance risk vis-a`-vis 

their counterparty to a given transaction 

when they rely on a registered clearing 

agency participant to facilitate the 

clearing of such transaction on the 

customer’s behalf, but the risk of nonperformance in this case differs from the 

risk that parties to contracts generally 

assume. Notably, because the registered 

clearing agency may guarantee the 

transaction, the risk to the customer 

may be lower than other types of 

contractual relationships due to this 

extra layer of protection 

(notwithstanding the particular 

arrangements that may exist between 

the participant and its customer in the 

event of a default). The risk exposure 

between a participant and its customer 

is thus different in nature and scope 

than the risk exposure between a 

registered clearing agency and its 

participant. Consequently, the nature of 

these contractual obligations does not 

support extending by Commission rule 

representation on the board of a 

registered clearing agency to the 

customers of registered clearing agency 

participants. However, the Commission 

recognizes the importance of the board 

considering the views of stakeholders, 

including customers of registered 

clearing agency participants, and the 

Commission has provided opportunities 

for such views to be considered under 

Rule 17Ad–25(c) when nominating 

directors, and when soliciting 

viewpoints and feedback consistent 

with Rule 17Ad–25(j).52

One commenter agreed with the 

Commission’s approach to allow 

registered clearing agencies (and in 

particular, nominating committees 

thereof) to exercise judgment to 

determine what constitutes materiality 

under the ‘‘material relationship’’ 

definition, rather than have it further 

defined, such as by numerical 

thresholds of financial compensation.53

The commenter stated that such 

numerical thresholds would not be 

useful if established in advance. 

Likewise, the commenter stated that the 

concept of ‘‘control’’ should be left to 

the determination of the nominating 

committee of the registered clearing 

agency, as long as the analysis is 

documented and auditable.54 The 

Commission agrees that numerical 

thresholds may not reflect the potential 

intersection of a director’s personal 

finances and the ‘‘material relationship’’ 

definition, particularly when such 

thresholds have been formulated ex 

ante, and that, more generally, it is 

appropriate for the nominating 

committee to determine whether a 

director qualifies as an independent 

director, as further discussed in Part 

II.B.2 below.55

One commenter drew a comparison 

between the Commission’s required 

levels of independent directors and the 

levels of a related category under the 

European Market Infrastructure 

Regulation (‘‘EMIR’’) 56 called 

Independent Non-Executive Directors 

(‘‘INEDs’’).57 The commenter stated that 

currently EMIR requires at least onethird (and no fewer than two) of clearing 

agency board members to be INEDs. The 

commenter stated that requiring more 

INEDs would not result in greater 

transparency or objective governance, 

and that requiring a majority of the 

board to be INEDs would result in large 

boards that are ‘‘functionally 

inefficient.’’ 58 The commenter also 

pointed out that the INED definition 

excluded representatives of clearing 

agency participants, regardless of 

whether those clearing agency 

participants were shareholders or not. 

Consequently, the commenter requested 

greater alignment between EMIR and the 

Commission’s proposal. The 

Commission supports alignment where 

practicable and concludes that the two 

provisions are not in conflict with one 

another as currently structured based on 

the following: although the EMIR 

standard has a lower percentage 

requirement, it also defines 

independence more strictly than the 

Commission’s proposal, and so the pool 

of eligible directors under EMIR is 

smaller than under Rule 17Ad–25. For 

example, if a clearing agency dually 


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59 Id. at 6. 

60 Id. at 4. 61 Id. at 5. 62LSEG at 5. 

registered under EMIR and with the 

Commission had a board with six 

persons, with two persons representing 

a controlling shareholder, two persons 

who were risk management 

professionals at two participants, and 

two persons who were independent 

academics, then that board could (with 

all other factors being met) comply with 

both the Commission’s requirement of a 

majority of independent directors (four 

out of six), and the EMIR requirement of 

one-third INEDs (two out of six). 

Therefore, the requirements for INEDs 

under EMIR and for independent 

directors under the Commission’s 

proposal do not conflict with each 

other. 

The commenter also stated that 

operating under two definitions of 

‘‘independent director’’ would require a 

dual registrant to undertake two sets of 

analyses because a director could 

qualify as independent under one 

standard but not the other, though the 

commenter also stated that the 

Commission’s approach would not raise 

any compliance issues by itself.59 The 

commenter encouraged alignment 

where possible. In this situation, the 

additional burden of conducting 

evaluations under these two standards 

is insignificant, because the evaluation 

process of a director’s material 

relationships is highly fact-specific. The 

evaluation of whether a director meets 

the standard for independence generally 

should be broad and thorough, and it 

generally should turn on the specific 

facts of each director’s individual 

circumstances. A broad inquiry that 

satisfies the requirement to determine 

whether material relationships exist will 

likely already reveal whether a 

candidate meets the criteria set forth in 

each respective jurisdiction, so it is 

unlikely that fully aligning the 

Commission’s rules with the EMIR 

standard will result in cost or time 

savings. 

In connection with the request for 

harmonization, the commenter stated 

that EMIR’s limited INED requirement 

helps ensure that the board retains 

expertise sufficient to make decisions 

about budget, investments, and 

commercial strategy.60 As discussed 

above, the Commission’s definition of 

‘‘independent director’’ would allow 

participants with experience on these 

strategic matters to also qualify as an 

independent director, so the concern 

from the commenter that a majority of 

the board being independent directors 

would result in inexperienced decision 

makers is misplaced, due to the 

differences in the scope of the 

respective definitions of INED and the 

Commission’s proposal. 

With respect to the inclusion of 

affiliates of the registered clearing 

agency in the definition of ‘‘material 

relationship’’ and in Rule 17Ad–25(f), 

the commenter expressed preference for 

consistency with how EMIR handles 

affiliates.61 The commenter stated that 

under the EMIR regulatory framework, a 

clearing agency that is part of a group 

must evaluate whether it has the 

necessary level of independence to meet 

its regulatory obligations as a distinct 

legal person, and whether its 

independence could be compromised by 

the group structure or by any board 

member also being a member of the 

board of other entities of the same 

group. Therefore, under EMIR, if a 

clearing agency has the necessary level 

of independence to meet its regulatory 

requirements, a director could be 

considered independent even if she 

held a non-executive role at another 

clearing agency within the same group, 

which allows for consistency in risk 

management and cross-fertilization of 

ideas within a group. 

The Commission used the term 

‘‘affiliates’’ in the definition of 

‘‘independent director’’ with respect to 

material relationships, and the 

exclusions in Rule 17Ad–25(f), to 

ensure an appropriate minimum 

standard across clearing agencies with 

respect to the board composition 

requirements in the rule. If affiliate 

relationships were excluded from the 

definition of ‘‘independent director’’ 

with respect to material relationships, a 

registered clearing agency could create 

an organizational structure where a 

majority of the board is aligned—such 

as through compensation—with an 

affiliate of the clearing agency. Benefits 

associated with the exchange of ideas 

can be obtained in other manners, such 

as information sharing agreements 

among affiliated companies. At the 

clearing agency, risk management 

should be tailored to the specific risks 

facing a particular registrant consistent 

with the statutory requirements for 

registration as a clearing agency, not 

with respect to its overall corporate 

group or affiliates. While affiliate 

relationships may, in some instances, 

enable a clearing agency to see risks 

outside of its own particular clearing 

agency function or services, consistency 

across affiliates is not per se an 

important risk management goal. A 

registered clearing agency generally 

should focus on identifying and 

managing the risks that it faces, rather 

than risks to its affiliates. Therefore, the 

Commission is adopting the definition 

of ‘‘material relationship’’ and the 

exclusions in Rule 17Ad–25(f) to 

include affiliates of a clearing agency as 

proposed. 

As to the adequacy of the 

Commission’s use of one-year lookback 

periods in Rule 17Ad–25(f), one 

commenter recommended a longer 

period of three to five years as an 

adequate lookback period.62 The 

commenter stated that there is a fiveyear requirement under EMIR, and that 

a one-year requirement could be 

considered too short because some 

payments may not be received by a 

director for a while (e.g., some payments 

may be deferred for up to four years), 

some projects to which a person has 

played a key role may not yet be 

delivered, and informal relationships 

may continue. The obligation not to 

have a material relationship applies in 

an ongoing manner, not simply to a 

moment in time. Although the lookback 

period that applies to the ‘‘material 

relationship’’ definition and to the list 

of exclusions in Rule 17Ad–25(f) covers 

the one-year period prior to the date that 

a determination of independence is 

made, delayed payments that a director 

might receive while serving as an 

independent director would be 

addressed due to the ongoing 

application of Rule 17Ad–25(f). For 

instance, if an independent director 

received payments in the third year of 

his or her term, such payments were 

related to relationships that existed two 

years prior to the start of that term, and 

such payments precluded a director 

from being independent under Rule 

17Ad–25(f), then the director would 

cease to qualify as an independent 

director at the time of the payment— 

irrespective of the lookback period. 

Consequently, extending the lookback 

period is not necessary to address any 

delayed or deferred activity because a 

director must meet the standard for an 

‘‘independent director’’ on an ongoing 

basis under the requirements of Rule 

17Ad–25(b). 

Several commenters stated that the 

possible inclusion of employees of 

clearing agency participants as 

independent directors on registered 

clearing agency boards would bring 

several benefits, including increasing 

the candidate pool, providing industry 

expertise, promoting a strong alignment 

between the risk management and 

operational integrity of the registered 

clearing agency, and bringing diverse 


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63See DTCC at 4; Saguato at 3 (supporting the 

inclusion of employees of participants because they 

have substantial financial exposure and a 

commitment to the resilience of the participant). 64 James Tabacchi, Chairman, Independent Dealer 

and Trader Association (Oct. 7, 2022) (‘‘IDTA’’) at 

1; see also Zimmerman (expressing general 

concerns about potential conflicts of interest among 

directors and senior managers). 65CCP12 at 3. 66Better Markets at 16. 67 Id. at 10. 

68 Id. at 17. 

69 Id. at 16–17. 

70 15 U.S.C. 78q–1(b)(3)(C). 

71Saguato at 2. 

72 Id. at 3. 

73See Governance Proposing Release, supra note 

2, at 51844. 

74Saguato at 3. 

perspectives.63 One commenter 

disagreed, stating that the definition of 

‘‘material relationship’’ should be 

expanded to ensure that employees or 

other representatives of participants be 

excluded from qualifying as 

independent,64 while another 

commenter stated that the candidate 

pool from among employees of clearing 

agency participants would shrink under 

the proposed rules.65 Having qualified, 

experienced persons serving in these 

director roles promotes sound risk 

management practices at the registered 

clearing agency because such persons 

bring necessary technical experience in 

clearing agency risk management. The 

Commission supports the inclusion of 

employees of participants in the 

potential pool of candidates for 

independent director in order to make 

such experienced personnel available 

for consideration as candidates, 

provided that such personnel do not 

have relationships that would preclude 

them from being independent directors. 

The Commission acknowledges that the 

candidate pool would shrink to the 

extent that experienced employees of 

participants also have material 

relationships that pose a conflict of 

interest (for example, if such employees’ 

judgment or independent decisionmaking could be affected by their 

relationships with a participant), other 

than being an employee of a participant. 

Additionally, a separate commenter 

requested that the independent director 

definition explicitly require 

independence from dominant market 

participants.66 The commenter stated 

that the derivatives markets, within 

which the Commission regulates 

clearing agencies for security-based 

swaps, continue to be dominated by a 

few market participants, thereby 

concentrating risk and skewing 

incentives towards the largest clearing 

agency participants, at the expense of 

appropriate risk management and 

competition.67 The commenter 

suggested that the lowering of the 

majority requirement to 34 percent of 

independent directors when 

participants are a majority of owners 

should have restrictions as to the size of 

the clearing agency participants that can 

qualify, to exclude dominant market 

participants.68 The commenter 

disagreed with the Commission that 

existing regulations, such as Rule 17Ad– 

22, have adequately addressed market 

dominance by certain participants, and 

stated that anecdotal evidence from 

abroad suggests that clearing agencies 

hold such dominant participants to less 

scrutiny with respect to risk 

management requirements, while small 

and medium-sized entities struggle to 

maintain access to central clearing.69

The liability inherent to being a 

clearing agency participant, to which 

participants of all sizes subject 

themselves, aligns their interests with 

the goal of a well-managed registered 

clearing agency, even if incentives to 

free-ride, and thereby have the costs of 

managing the clearing agency borne by 

other participants, remain. Because 

Exchange Act section 17A(b)(3)(C) states 

that ‘‘the Commission may determine 

that the representation of participants is 

fair if they are afforded a reasonable 

opportunity to acquire voting stock of 

the clearing agency, directly or 

indirectly, in reasonable proportion to 

their use of such clearing agency,’’ 70 it 

remains appropriate to not summarily 

restrict representation based on volume 

of use, which is what the commenter is 

requesting. Therefore, the Commission 

is not removing the ability of employees 

or other representatives of certain sizes 

of clearing agency participants to 

qualify as independent directors, 

provided all other requirements of Rule 

17Ad–25 are met. 

4. Incentive Structures 

One commenter requested that the 

Commission undertake a comprehensive 

study of how various ownership models 

allocated incentives among owners and 

participants of registered clearing 

agencies, stating that different 

ownership models might each require a 

special regulatory approach to ensure a 

full alignment of incentives among 

stakeholders.71 In particular, the 

commenter stated that conflicts of 

interest arise in the investor-owned 

model, where some participants are not 

owners but still face mutualized risk at 

the clearing agency, as compared to a 

participant-owned model. The rule 

already addresses the distinction 

between clearing agencies that are 

majority-owned by participants and 

other types of clearing agencies by 

applying a 34 percent independent 

director requirement to the former 

category. The commenter expressed the 

view that applying a different standard 

for independent directors between 

participant-owned and investor-owned 

clearing agencies is unnecessary, in 

part, because the commenter read the 

economic analysis in the Governance 

Proposing Release to state that all 

participant-owned clearing agencies 

already have boards with a majority of 

independent directors.72 However, 

Table 3 in the Governance Proposing 

Release discussed different criteria that 

applied to certain directors,73 and the 

Governance Proposing Release did not 

discuss the extent to which these 

criteria may differ from the proposed 

definition of and proposed requirements 

for independent directors. Importantly, 

although registered clearing agencies 

may currently label some directors as 

‘‘independent,’’ such directors may not 

meet the requirements for an 

‘‘independent director’’ under Rule 

17Ad–25. Application of Rule 17Ad–25 

to existing registered clearing agencies 

will impose composition standards that 

better serve the goals of Exchange Act 

section 17A than current practice. 

Additionally, Rule 17Ad–25 will apply 

to prospective applicants that may seek 

to be registered clearing agencies in the 

future—not only the current set—and so 

establishing a standard that existing 

registered clearing agencies may already 

satisfy can nonetheless still ensure a 

certain minimum standard across 

potential future applicants and 

registrants. Therefore, the Commission 

is not modifying the application of the 

34 percent independent directors versus 

a majority of independent directors in 

the final rule. 

The same commenter also stated that, 

if a requirement for a majority of 

independent directors leads to effective 

board oversight of management, then all 

registered clearing agencies—not just 

those that are investor-owned—should 

be subject to that standard.74 However, 

the ‘‘independent director’’ requirement 

in Rule 17Ad–25 considers, in addition 

to a director’s independence from 

management, a director’s material 

relationships with a registered clearing 

agency’s affiliates, owners, vendors, 

customers, and controlling interests of 

participants. Because the requirements 

in Rule 17Ad–25 preclude an individual 

from serving as an independent director 

when such material relationships 

reasonably could affect the independent 

judgment or decision-making of the 

director, a registered clearing agency 

that is majority-owned by participants 


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75Better Markets at 5–6, 12–14. 

76See ISDA at 6. 

77See 17 CFR 240.17Ad–22(e)(2)(ii), (iii); see also 

17 CFR 240.17Ad–22(d)(8) (requiring registered 

clearing agencies that are not covered clearing 

agencies to establish, implement, maintain and 

enforce governance arrangements that are clear and 

transparent to fulfill the public interest 

requirements in Exchange Act section 17A). 

78 IDTA at 2–3. 

79See 15 U.S.C. 78q–1(b)(3)(C) (‘‘The Commission 

may determine that the representation of 

participants is fair if they are afforded a reasonable 

opportunity to acquire voting stock of the clearing 

agency, directly or indirectly, in reasonable 

proportion to their use of such clearing agency.’’). 80Better Markets at 14. 81 Id. at 10. 82 Id. at 15; see also Exchange Act Release No. 

63107 (Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) 

(proposing Regulation MC). 

could determine that an employee of an 

owner-participant has relationships that 

preclude the employee from serving as 

an independent director—not on the 

basis of her employment relationship to 

the participant but rather other potential 

entanglements that may emerge from the 

employee’s other material relationships 

with the clearing agency. For example, 

if an employee of an owner of a clearing 

agency received stock options as part of 

a compensation package, that employee 

has interests tied to the profits of the 

clearing agency distinct from an 

employee who receives stock options of 

a clearing agency participant that is not 

also an owner of a clearing agency. The 

existence of such interests tied to profit 

that carry through ownership structures 

back to the clearing agency poses a 

potential conflict of interest for a 

director of that clearing agency. In this 

way, a registered clearing agency may 

determine that employees of owners are 

less likely than employees of 

participants to satisfy the independent 

director requirement. Applying a 51 

percent requirement to registered 

clearing agencies that are majorityowned by their participants could, in 

the view of a registered clearing agency 

evaluating the material relationships of 

its nominees for independent directors, 

result in minority representation of 

owners and participants. Therefore, the 

rule applies a lower threshold to 

participant-owned clearing agencies to 

provide the shareholders of such a 

registered clearing agency greater 

discretion to nominate, as independent 

directors, candidates from among, for 

example, the employees of participantowners. Applying the higher standard to 

all clearing agencies, solely to insulate 

the board from influence by 

management, could restrict access to 

representatives of participant-owners in 

a way that may impair the board’s 

ability to oversee the clearing agency’s 

risk management function effectively. 

One commenter agreed that the 

proposed requirements for independent 

directors address conflicts of interest, 

but the commenter also stated that the 

solution was incomplete to address the 

problem and so recommended that the 

Commission also adopt a ‘‘skin-in-thegame’’ requirement.75 Specifically, this 

commenter stated its belief that it is 

necessary to align the incentives 

between a clearing agency and its 

participants by requiring the clearing 

agency to subject a meaningful amount 

of its own capital to potential loss after 

a default of a participant, in particular 

after the defaulting participant’s margin 

and guaranty fund contributions are 

used to satisfy its obligations, but before 

any margin or guaranty fund 

contributions of other non-defaulting 

participants are used to satisfy the 

obligations of the defaulting participant. 

This idea seeks to encourage a clearing 

agency to manage risks well, to prevent 

its own capital from being lost during a 

default. This commenter’s suggestion is 

beyond the scope of the present 

rulemaking. 

One commenter expressed concern 

that employees of participants who are 

acting as independent directors and 

representing the interests of the clearing 

agency could have conflicts of interest 

between these two roles.76 The 

commenter recommended that the 

Commission impose a requirement for 

such persons to have due regard to 

market stability in their role at the 

clearing agency. Directors do not need 

to have a specific obligation applied to 

them in their individual capacity to 

consider market stability. Rules 17Ad– 

22(e)(2)(ii) and (iii) require covered 

clearing agencies to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements that clearly 

prioritize the safety and efficiency of the 

covered clearing agency and support the 

public interest requirements in 

Exchange Act section 17A.77 These 

existing requirements are sufficient to 

ensure a registered clearing agency has 

due regard for financial stability. 

One commenter agreed with the 

Commission’s concerns that a small 

number of participants—if allowed to 

exercise control over a clearing 

agency—can promote margin or other 

requirements that are not commensurate 

with the risks of a participant’s specific 

products, portfolio market, business 

model, and size, which could lead to a 

concentration of risk in a few dominant 

market participants who benefit.78 The 

commenter suggested that the 

Commission adopt rules that would 

address non-independent directors and 

would require diversity among 

participant representation on the board, 

based on size and level of specialization 

by said participants. Otherwise, the 

commenter suggested, the 

representation among participants will 

be lopsided, leading to greater 

concentration of risk among the clearing 

agency’s largest participants. The 

Commission agrees that the interests of 

participants are not always homogenous 

or aligned, and therefore, the interests of 

smaller participants can diverge from 

those of the largest. However, the 

Exchange Act requirement for fair 

representation allows for the 

consideration of proportionality as an 

element.79 Although all participants are 

equally exposed to default risk, larger 

firms may be more impacted by policies 

that apply based on transaction volume. 

Thus, it can be appropriate to apportion 

representation according to use of the 

clearing agency, even if an effect of this 

approach is to be disproportionate as to 

the number of small, medium, or large 

participants represented on the board 

relative to the total number of small, 

medium, or large participants in a 

clearing agency’s customer base at any 

particular time. Further, there could be 

arguments that reducing the degree of 

proportionality of representation 

relative to use of the clearing agency 

could lead to negative externalities that 

disproportionately impact larger 

participants. Accordingly, the 

Commission is declining to expand the 

scope of this rule to develop participant 

categories and to require certain level of 

participant representation on the board 

as non-independent directors among 

those categories. 

5. Ownership Structures 

One commenter stated that the largest 

clearing agency participants do not 

necessarily need personal influence 

over a director because they possess 

economic leverage over the clearing 

agency.80 Additionally, the commenter 

requested that special attention be paid 

towards participants at registered 

clearing agencies that clear derivatives 

products because of the risk posed to 

effective governance by an ‘‘oligopoly’’ 

of market power exercised by certain 

derivatives dealers.81 Instead of relying 

on independent directors as a bulwark 

against conflicts of interest, the 

commenter suggested restoration of the 

ownership limits that were previously 

proposed in Regulation MC to address 

market concentration.82 The commenter 

further suggested that the Commission 

go beyond what was originally proposed 

in Regulation MC and add restrictions 


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83Better Markets at 19. 

84See infra Part II.D (further discussing final 

Rules 17Ad–25(g) and (h)). 

85Better Markets at 19. 

86Barclays et al. at 3; see also SIFMA at 4 (stating 

that ‘‘greater transparency and a more rigorous 

governance process, including consultation with 

primary regulators, regarding the use of emergency 

powers should help further confidence in the 

overall financial system and ensure that affected 

stakeholders are aware and have buy-in when such 

powers are used.’’); ISDA at 2. 

87See, e.g., Bylaws, The Option Clearing 

Corporation, at Article II, Section 15 (stating, 

‘‘During any emergency which results, directly or 

indirectly, from an attack (including a terrorist 

attack) on the United States or on a locality in 

which the Corporation maintains an office or 

customarily holds meetings of the Board of 

Directors, or from a war, armed hostilities, 

insurrection or other calamity involving the United 

States or any such locality, or from any nuclear or 

atomic disaster, or from any other catastrophe, 

disaster, (including any environmental or natural 

disaster), communications systems failure, or other 

similar condition, in which a quorum (as specified 

in Article III of the By-Laws) of the Board of 

Directors or a standing committee thereof cannot 

readily be convened for action (an ‘‘Emergency’’), 

the following provisions of this Section 15 shall be 

operative notwithstanding any other provision in 

any of the sections (other than Section 110) of the 

Delaware Corporation Law or in the Certificate of 

Incorporation, By-Laws or Rules of the Corporation. 

The Chairman, Chief Executive Officer, Chief 

Operating Officer or, if it is not feasible for the 

Chairman, Chief Executive Officer, or Chief 

Operating Officer to take such action, then another 

officer who is a Designated Officer is authorized to 

declare the existence of such Emergency and to 

declare this By-Law to be in effect.’’), https://

www.theocc.com/company-information/documentsand-archives/by-laws-and-rules. 

88See, e.g., ‘‘Rule 38: Market Disruption and 

Force Majeure,’’ DTC Rulebook, https://

www.dtcc.com/-/media/Files/Downloads/legal/ 

rules/dtc_rules.pdf. 

89Better Markets at 18. 

90See Organizational Certificate of the Depository 

Trust Corporation, https://www.dtcc.com/legal/ 

rules-and-procedures. 

91See infra Part II.D.2 (further discussing the 

‘‘reasonably designed’’ and ‘‘reasonableness’’ 

elements of Rules 17Ad–25(g) and (h)). 

on commercial arrangements for 

volume, such as volumetric discounts, 

rebates, or revenue sharing. This 

suggestion goes beyond the scope of this 

rulemaking because they concern 

restrictions on commercial 

arrangements rather than requirements 

for board composition and governance. 

The commenter also suggested 

expanding the definition of ‘‘affiliate’’ to 

deem all owners and shareholders as 

affiliates, under the reasoning that a 

handful of dominant shareholders could 

‘‘collude’’ among one another to 

exercise constructive control over a 

clearing agency, even if each individual 

shareholder did not meet the definition 

for control itself.83 Many participants 

are also shareholders of a clearing 

agency, and so if the affiliate definition 

were to be expanded, it would restrict 

employees of many participants from 

meeting the independent director 

definition as a result of the exclusion in 

Rule 17Ad–25(f)(2). The Commission is 

concerned that such an expanded 

definition could interfere with the 

ability of a clearing agency to afford fair 

representation to participants, as 

contemplated by Exchange Act section 

17A(b)(3)(C), which discusses the ability 

of participants to participate in board 

governance. In addition, Rule 17Ad–25 

includes elements directed at the 

problems of ‘‘collusion’’ in multiple 

ways, and Rules 17Ad–25(g) and (h), 

and the associated requirements to 

address and disclose conflicts of 

interest, are better suited to address 

such potential ‘‘collusion’’ among 

certain shareholders because they are 

broad-based and not restricted to one 

potential source of conflicts (i.e., 

affiliates).84

6. Circumvention 

One commenter expressed concern 

that the proposal did not specify who at 

the clearing agency should determine 

whether a fact pattern meets the 

definition of ‘‘material relationship,’’ 

reasoning that if the board can make 

that determination, there could be an 

incentive on the board of directors to 

give each other a ‘‘free pass’’ as to their 

potentially objectionable 

relationships.85 Instead, the commenter 

suggested an explicit requirement for 

disinterested compliance officers or 

qualified outside professionals to 

determine whether material 

relationships exist. The proposed rules 

did not specify who at the clearing 

agency should evaluate relationships 

under this definition, and the 

Commission has modified the final rules 

to specify that the nominating 

committee is required to evaluate all 

board members under the independent 

director standard, as discussed further 

in Part II.B.2. 

Some commenters provided 

recommendations that went beyond the 

composition of the board and instead 

addressed the authority of a board more 

generally. Specifically, some 

commenters requested that the 

Commission apply more rigorous 

governance procedures to clearing 

agencies with respect to their emergency 

powers as set forth in their rulebooks, 

which the commenters stated were 

broad and vaguely defined.86 But 

emergency powers exist at two levels for 

many clearing agencies: those 

provisions that impact the rights and 

obligations of the board, as set forth in 

the organizational documents of the 

legal entity itself (such as the ability of 

the board to act without a quorum in the 

event of an emergency, such as a 

terrorist attack),87 and those provisions 

that impact the clearing agencies’ rights 

and obligations with respect to the 

clearing members.88 Although the 

Commission’s rules do not directly 

impact the parameters around which 

emergency powers can be exercised, 

either at the board level or under the 

rules of the clearing agency, they do 

address who will make decisions when 

exercising such emergency powers. 

Ensuring that decision-making 

processes are clear, transparent, and 

fair, and that market participants have 

confidence in those processes in an 

emergency—including that neither 

clearing agency owners nor participants 

will dominate the decision-making 

process to achieve their own ends—can 

help reassure those who may be 

significantly impacted by such 

decisions. Rule 17Ad–25 meaningfully 

addresses such generalized concerns 

about the fair and even-handed use of 

emergency powers by establishing new 

standards for board governance 

applicable to registered clearing 

agencies. 

Finally, one commenter suggested 

that the majority independent director 

requirement could be evaded by any 

supermajority requirement for voting or 

quorums of the board.89 The 

Commission is aware that some 

registered clearing agencies currently 

apply supermajority requirements in 

certain scenarios, such as a requirement 

that three-fourths of an entire board 

shall constitute a quorum for purposes 

of electing the board chair.90 Policies 

and procedures to identify, mitigate, or 

eliminate existing or potential conflicts 

of interest required under Rule 17Ad– 

25(g) generally should provide for the 

clearing agency to evaluate whether any 

supermajority requirements in any of 

the registered clearing agency’s rules, 

policies, and procedures would allow 

directors with potential conflicts of 

interest to steer the clearing agency in 

service of those personal interests by 

avoiding any mechanisms that might 

require mitigation or elimination (e.g., 

recusal by the director on the matter at 

hand) of the conflict of interest. A 

registered clearing agency generally 

should consider whether its policies 

and procedures under Rule 17Ad–25(g) 

are ‘‘reasonably designed’’ if provisions 

of its rules, policies or procedures 

would allow non-independent directors 

to exercise disproportionately greater 

control of certain board decisions 

beyond what their numbers would 

otherwise allow.91


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92As explained in the Governance Proposing 

Release, supra note 2, at 51828 & n.107, 15 U.S.C. 

78q–1(a)(3)(C) identifies the circumstances that 

subject a person to ‘‘statutory disqualification’’ with 

respect to membership or participation in, or 

association with a member of, a self-regulatory 

organization, such as a registered clearing agency. 

93 Governance Proposing Release, supra note 2, at 

51829 (describing these arrangements other than a 

nominating committee as ‘‘other governing bodies 

and/or constituents of their organizational 

structure’’). 

94 Id. 

95 Id. at 51830. 

96See, e.g., Better Markets at 4; DTCC at 5; IDTA 

at 4; ISDA at 6; LSEG at 8; OCC at 3; Saguato at 

3. But see ICE at 3 (describing the proposed 

approach as ‘‘too prescriptive’’). 

97 DTCC at 5; LSEG at 8; OCC at 7; Saguato at 4; 

see also Governance Proposing Release, supra note 

2, at 51830 (requesting comment on the following: 

‘‘Is it appropriate for the Commission to require that 

the nominating committee be the exclusive venue 

for evaluating nominees for director to the board of 

directors? What alternative arrangements or 

processes might also be appropriate for evaluating 

director nominees?’’). 

98OCC at 7–8. 

99See Governance Proposing Release, supra note 

2, at 51829. 

100See id. 

B. Nominating Committee 

1. Proposed Rule 17Ad–25(c) 

Proposed Rule 17Ad–25(c)(1) would 

require each registered clearing agency 

to establish a nominating committee and 

a written evaluation process whereby 

such nominating committee shall 

evaluate individual nominees to serve 

as directors. Proposed Rule 17Ad– 

25(c)(2) would require that (i) 

independent directors compose a 

majority of the nominating committee, 

and (ii) an independent director chair 

the nominating committee. Proposed 

Rule 17Ad–25(c)(3) would require the 

nominating committee to specify and 

document fitness standards, which must 

be approved by the board. Such fitness 

standards for serving as a director 

would need to be consistent with all the 

requirements of proposed Rule 17Ad– 

25, and also would include that the 

individual nominee is not subject to any 

statutory disqualification as defined 

under section 3(a)(39) of the Exchange 

Act.92 Proposed Rule 17Ad–25(c)(4) 

would require the nominating 

committee to document the outcome of 

the clearing agency’s written evaluation 

process in a manner that is consistent 

with the written fitness standards 

required under proposed Rule 17Ad– 

25(c)(3). The process would require the 

nominating committee to: (i) take into 

account each nominee’s expertise, 

availability, and integrity, and 

demonstrate that the board, taken as a 

whole, has a diversity of skills, 

knowledge, experience, and 

perspectives; (ii) demonstrate that the 

nominating committee has considered 

whether a particular nominee would 

complement the other board members, 

such that, if elected, the board, taken as 

a whole, would represent the views of 

the owners and participants, including 

a selection of directors that reflects the 

range of different business strategies, 

models, and sizes across participants, as 

well as the range of customers and 

clients the participants serve; (iii) 

demonstrate that the nominating 

committee considered the views of other 

stakeholders who may be affected by the 

decisions of the registered clearing 

agency, including transfer agents, 

settlement banks, nostro agents, 

liquidity providers, technology or other 

service providers; and (iv) identify 

whether each selected nominee would 

meet the definition of independent 

director in proposed Rules 17Ad–25(a) 

and (f), and whether each selected 

nominee has a known material 

relationship with the registered clearing 

agency or any affiliate thereof, an 

owner, a participant, or a representative 

of another type of stakeholder of the 

registered clearing agency described in 

(iii) above. 

In the Governance Proposing Release, 

the Commission explained that some 

registered clearing agencies currently 

use governance arrangements other than 

a nominating committee to select certain 

directors.93 It also explained that, while 

the proposed rule would not prohibit 

such approaches, it would require that 

any such nominees be submitted first to 

the nominating committee for 

evaluation—before being considered by 

the boardpursuant to a written 

evaluation process established by the 

registered clearing agency.94

With respect to proposed Rule 17Ad– 

25(c)(4)(iii), which would give the 

nominating committee discretion to 

determine how to consider the views of 

other stakeholders, the Commission 

stated that relevant stakeholders 

generally would include persons and 

entities that access the national system 

for clearance and settlement indirectly 

(e.g., institutional and retail investors), 

entities that rely on the national system 

for clearance and settlement to more 

effectively provide services to investors 

and market participants, and other 

market infrastructures.95

Commenters generally supported the 

proposed rules addressing the 

nominating committee.96 As discussed 

in more detail below, commenters 

sought clarity regarding discussion in 

the Governance Proposing Release 

stating that the nominating committee 

would be the ‘‘exclusive venue’’ for 

considering director nominees, as 

discussed further below. In addition, 

some commenters recommended 

modifying the proposed approach to 

participation by small and mediumsized firms on the board, and regarding 

the percent of directors that are 

independent directors serving on the 

nominating committees. The 

Commission addresses each of these 

topics in Parts II.B.2 through II.B.4. 

2. As ‘‘Exclusive Venue’’ for 

Considering Nominees 

Several commenters sought clarity 

regarding statements in the Governance 

Proposing Release that the nominating 

committee be the ‘‘exclusive’’ venue for 

considering nominees.97 As discussed 

further below, the Commission is 

modifying the rule being adopted to 

address more clearly scenarios in which 

directors may be nominated or 

appointed directly by shareholders 

pursuant to the organizational 

documents of the registered clearing 

agency outside of the process 

established by the nominating 

committee. 

First, one commenter recommended 

that the Commission modify the rule so 

that the nominating committee only 

conduct written evaluation of nominees 

and not appointees that may be selected 

via other mechanisms in the governance 

structure.98 For example, OCC allows 

certain participant exchanges to select 

‘‘Exchange Director’’ nominees for 

election to OCC’s board. The proposed 

rule text does not address this specific 

type of selection process, but as 

discussed in the Governance Proposing 

Release,99 proposed Rule 17Ad–25(c) 

would not prohibit the selection of such 

directors appointed pursuant to such a 

process. Nonetheless, as previously 

discussed in the Governance Proposing 

Release, it would require that any such 

nominees be submitted first to the 

nominating committee for evaluation— 

before being considered by the board— 

pursuant to a written evaluation process 

established by the registered clearing 

agency.100 This proposed requirement 

would help ensure that nominees are 

evaluated in a manner consistent with 

the requirements for independent 

directors and other qualifications to 

serve. 

Accordingly, as proposed, Rule 

17Ad–25(c) was intended to ensure that, 

with respect to all nominees and 

appointed directors, the nominating 

committee would evaluate each 

nominee or appointee for director, no 

matter the source of her nomination or 

equivalent selection as director, against 

the standards for fitness and 


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101See Governance Proposing Release, supra note 

2, at 51829 n.110 (providing the same example). 

102See infra Part II.D (further discussing both a 

clearing agency’s entity-wide obligations and a 

director’s specific obligations relating to potential 

conflicts of interest and the evaluation of material 

relationships). 

103See Rule 17Ad–25(b)(2) (requiring, among 

other things, that the registered clearing agency 

broadly consider all the relevant facts and 

circumstances on an ongoing basis to affirmatively 

determine that a director does not have a material 

relationship with the registered clearing agency or 

an affiliate of the registered clearing agency). 

104LSEG at 4. 

105 DTCC at 5. 

106 ICE at 3. 

independence established by Rule 

17Ad–25.101 This ensures that the 

board, the participants of the registered 

clearing agency, and ultimately other 

stakeholders and the public, have 

confidence in the fitness of directors 

generally and in the independence 

standard applied to directors to qualify 

as independent directors. The 

commenter’s recommended approach 

would be inconsistent with the purpose 

and intent of proposed Rule 17Ad–25 

because proposed Rule 17Ad–25(c) was 

intended to ensure that, with respect to 

all directors, the nominating committee 

would evaluate each nominee, no matter 

the source of their nomination, against 

the standards for fitness and 

independence established by Rule 

17Ad–25. To the extent that any 

directors are ‘‘appointed,’’ it is 

appropriate to subject such 

‘‘appointees’’ to the same standards as 

other nominees for director. Doing so 

would not slow or otherwise stymie the 

appointment of such directors because, 

regardless of how they are selected to 

serve on the board, all directors are 

subject to the same fitness standards 

and also would be subject to disclosure 

requirements regarding the reporting of 

potential conflicts of interest and 

material relationships.102 Specifically, 

Rule 17Ad–25(c)(4)(ii) requires the 

nominating committee to demonstrate 

that it has considered whether a 

particular nominee would complement 

the other board members, such that, if 

elected, the board of directors, taken as 

a whole, would represent the views of 

the owners and participants, including 

a selection of directors that reflects the 

range of different business strategies, 

models, and sizes across participants, as 

well as the range of customers and 

clients the participants serve. Because 

this requirement is focused on board 

composition, excluding any directors 

from the requirement would undermine 

the purpose of the rule and the ability 

of the nominating committee to evaluate 

board composition as a whole. 

Similarly, proposed Rule 17Ad– 

25(c)(4)(iv) requires the nominating 

committee to identify whether each 

nominee has a known material 

relationship with the registered clearing 

agency or any affiliate thereof, an 

owner, a participant, or a representative 

of another stakeholder of the registered 

clearing agency. Because this 

requirement establishes a baseline 

against which the registered clearing 

agency will need to evaluate potential 

conflicts of interest, regardless of 

whether a director is intended to be 

independent, the nominating committee 

should evaluate appointed directors as 

well. Such requirement helps ensure 

that the clearing agency can evaluate 

potential conflicts of interest that may 

require a director to recuse as to certain 

matters before the board. The 

Commission therefore is not modifying 

the rule to exclude from evaluation by 

the nominating committee nominees or 

directors who are appointed by other 

means pursuant to the organizing 

documents of the registered clearing 

agency. 

Notwithstanding the above, the 

Commission is modifying Rule 17Ad– 

25(c) in two ways: (a) the Commission 

is modifying paragraph (1) to add that 

the nominating committee shall also 

‘‘evaluate the independence of 

nominees and directors,’’ in addition to 

evaluating nominees for serving as 

directors, and (b) the Commission is 

modifying paragraph (4)(iv) in two 

places to specify that the evaluation 

process applies to nominees as well as 

directors. Pursuant to the latter 

modification, the written evaluation 

process required by the rule shall 

identify whether each nominee ‘‘or 

director’’ would meet the definition of 

independent director and whether each 

‘‘such nominee or director’’ has a 

known material relationship with the 

registered clearing agency (or an affiliate 

thereof).103 These changes ensure that 

the final rule addresses the role of the 

nominating committee in evaluating 

directors which it did not itself 

nominate because their nominations 

came through different processes 

specified in the organizing documents 

of the registered clearing agency. 

Separately, the Commission is also 

modifying paragraph (4)(iii) to replace 

the term ‘‘impacted’’ with ‘‘affected.’’ 

This is a technical correction to avoid 

the use of informal language in the rule 

text. 

Second, as previously discussed in 

Part II.A.3, one commenter stated that 

the concept of ‘‘control’’ as used in 

certain definitions in and requirements 

of Rule 17Ad–25, should be left to the 

determination of the nominating 

committee of the registered clearing 

agency, as long as the analysis is 

documented and auditable.104 The 

Commission agrees and Rule 17Ad– 

25(c)(1) accordingly includes a 

requirement for a written evaluation 

process, so that the clearing agency has 

documentation as to its determinations 

of control. 

Third, one commenter sought clarity 

as to whether the nominating committee 

can perform other functions.105

Specifically, the commenter explained 

that a registered clearing agency might 

establish one committee that performs 

the entire function and role of the 

nominating committee but also consider 

other governance functions more 

broadly. Such an approach can be 

appropriate and consistent with the 

adopted rule. Rule 17Ad–25(c), as 

discussed above and modified, requires 

that the nominating committee evaluate 

each nominee for serving as a director 

and evaluate the independence of 

nominees and directors. A committee 

that performs these functions would 

satisfy the requirements of the rule, 

even if it also performed additional 

functions as specified in the organizing 

documents of the registered clearing 

agency. A registered clearing agency, 

however, generally should take account 

of the overall workload imposed on the 

nominating committee in the organizing 

documents and ensure that the 

nominating committee has sufficient 

time and resources to fulfill the 

functions required by Rule 17Ad–25(c), 

which include evaluating nominees and 

directors as explained above and 

establishing the fitness standards for 

serving on the board. 

Fourth, one commenter asked 

whether the board could take on the 

functions of the nominating committee 

if it met all requirements applicable to 

the nominating committee.106 Such an 

approach can be appropriate and 

consistent with the rule. Consistent with 

the requirements in Rule 17Ad–25(c)(2), 

such an approach would require that a 

majority of the directors serving on the 

board be independent directors— 

regardless of the ownership structure of 

the clearing agency—and that the chair 

of the board be an independent director. 

3. Approach to Representation of Small 

and Medium-Sized Firms 

In addition to comments discussed in 

Part II.A.4 regarding establishing a 

‘‘right of participation’’ generally on the 

board by small and medium-sized 

participants of the registered clearing 

agency, commenters also expressed 

similar views specific to participation 


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107Better Markets at 20 (recommending that the 

Commission mandate participation from smaller 

clearing members to guard against a board that finds 

diversity within the ‘‘oligopoly of large dealers’’); 

IDTA at 4 (recommending that the Commission be 

more prescriptive in requiring that certain types of 

stakeholders, such as ‘‘not FSOC designated SIFIs’’ 

be afforded a right to participate). 

108See supra notes 76–78 and accompanying text 

(not modifying the rule to designate certain seats on 

the board for specific types of clearing agency 

participants or their customers). 

109 Governance Proposing Release, supra note 2, 

at 51829. 

110See infra Part II.F (further discussing Rule 

17Ad–25(j), which imposes an obligation on the 

board to formally consider stakeholder viewpoints, 

also helps ensure that the board is actively 

soliciting the views of those stakeholders who do 

not participate in the board directly so that the 

views of such stakeholders can be considered and 

incorporated into the board’s risk management and 

operations). 

111 DTCC at 5; ISDA at 6; LSEG at 9; Saguato at 

3; see also ICE at 3 (observing that, in its view, 

requiring written evaluations of nominees is 

unnecessary if the committee is also composed of 

a majority of independent directors). 

112 IDTA at 4. 

113 Governance Proposing Release, supra note 2 at 

51818 (‘‘Specifically, the Commission believes that 

addressing the composition of a board and its 

committees will help ensure effective governance, 

help promote transparency into decision-making 

processes, facilitate fair representation of owners 

and participants, and mitigate the potential effects 

of conflicts of interest between owners and 

participants, large and small participants, and 

direct and indirect participants.’’). 

114See supra Part II.A (further discussing Rule 

17Ad–25(b), which sets the general requirement for 

the number of independent directors required to 

serve on the board based on the percentage of 

ownership held by participants in the registered 

clearing agency). 

on the nominating committee. Two 

commenters recommended that the 

Commission specifically authorize such 

a right of participation on the 

nominating committee.107

Exchange Act section 17A(b)(3)(C) 

directs the Commission to ensure the 

fair representation of owners and 

participants in the selection of directors 

and the administration of affairs. As 

previously discussed in Part II.A.4, it 

can be appropriate to apportion 

representation according to use of the 

clearing agency, even if an effect of this 

approach is to be disproportionate as to 

the number of small, medium, or large 

participants represented on the board 

relative to the total number of small, 

medium, or large participants that use 

the clearing agency. In addition, 

reducing the degree of proportionality of 

representation relative to use of the 

clearing agency could lead to negative 

externalities. For these same reasons, 

the Commission is not modifying the 

proposed rule to require a ‘‘right of 

participation’’ on the nominating 

committee specific to small and 

medium-sized participants.108 In 

proposing Rule 17Ad–25(c), the 

Commission stated its belief that smaller 

participants and clients of participants 

generally should be represented on 

clearing agency boards and board 

committees, such that their views and 

perspectives are formally considered in 

board decisions that may impact 

them.109 In particular, the Commission 

explained that the diverse perspectives 

and expertise that smaller participants 

and clients of participants can provide 

will help inform a clearing agency’s 

operations and thereby improve the 

resilience of the registered clearing 

agency. Consistent with these views, 

board governance, and through it the 

risk management function of the 

clearing agency, benefits from diverse 

perspectives on risk management issues 

from across the range of stakeholders— 

owners, direct participants, and indirect 

participants—in a registered clearing 

agency. Accordingly, proposed Rules 

17Ad–25(c)(4)(i), (ii), and (iii) require 

that clearing agencies take steps to 

facilitate diverse perspectives and 

expertise on the board, including a 

requirement in Rule 17Ad–25(c)(4)(ii) 

for the nominating committee to 

demonstrate that it has considered 

whether a particular nominee would 

complement the other board members, 

such that, if elected, the board of 

directors, taken as a whole, would 

represent—among other things—the 

range of different business strategies, 

models, and sizes across participants, as 

well as the range of customers and 

clients the participants serve. These 

requirements ensure that the 

nominating committee considers a 

diverse set of backgrounds, experience, 

and skills in selecting and evaluating 

nominees for the board.110 In this 

regard, a registered clearing agency 

generally should provide in its 

governance arrangements that the 

nominating committee explicitly 

consider some nominees that represent 

the views of medium and small 

participants, but, in the Commission’s 

view, it is appropriate to leave 

discretion to the clearing agency and its 

board to evaluate and select the 

appropriate mix of nominees and 

directors mindful of its organizational 

documents, markets served, and 

products cleared. 

For the above reasons, the 

Commission is not modifying Rule 

17Ad–25(c) in response to these 

comments. 

4. Percent of Directors That Are 

Independent Directors 

Some commenters expressed support 

for the proposed approach to require 

that the chair of the nominating 

committee be an independent director 

and that a majority of the directors 

serving on the nominating committee be 

independent directors.111 One 

commenter recommended that the 

Commission modify the proposal to 

require that all directors serving on the 

nominating committee be independent 

directors.112 The commenter stated that 

such an approach would help maintain 

the standard for director independence 

and improve the overall quality of 

nominees. 

The Commission is not requiring all 

directors serving on the nominating 

committee be independent directors for 

two reasons. First, as a general matter, 

the proposal sought to ensure an 

approach to board governance that 

facilitates fair representation of both 

owners and participants in the selection 

of directors and the administration of a 

clearing agency’s affairs.113 The 

proposed approach is consistent with 

this requirement in part because it 

enables any individual director, 

whether independent or not, to serve on 

the nominating committee. Second, and 

mindful of the concern raised by the 

commenter, the proposed rule would 

require that a majority of the directors 

serving on the nominating committee be 

independent directors regardless of the 

ownership structure of the registered 

clearing agency.114 A majority of 

independent directors and a chair of the 

nominating committee that is also an 

independent director is sufficient to 

ensure the thoughtful consideration, 

evaluation, and selection of nominees, 

particularly for nominees to serve as 

independent directors on the board of a 

registered clearing agency. Given the 

definition of ‘‘independent director’’ 

used in Rule 17Ad–25, modifying the 

rule further to require that only 

independent directors can serve on the 

nominating committee would not 

clearly improve the functioning of the 

nominating committee. Independent 

directors would already be a majority of 

the nominating committee when making 

determinations, and as such, directors 

intended to represent owners of the 

clearing agency cannot comprise a 

majority of the nominating committee 

without also obtaining support from 

independent directors as to particular 

decisions. Because clearing agencies 

perform a unique and often systemically 

important function that facilitates 

effective risk management in the U.S. 

securities markets, enabling a wide 

range of stakeholders in the registered 

clearing agency to serve on the 

nominating committee, including 

directors who are not independent 

directors, can provide expertise, 


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115See 17 CFR 240.17Ad–22(e)(3)(iv); see also 

CCA Standards Adopting Release, supra note 4, at 

70807–09 (discussing that, under Rule 17Ad– 

22(e)(3)(iv), a registered clearing agency’s risk 

management framework must provide risk 

management personnel with a direct reporting line 

to, and oversight by, a RMC of the board of 

directors). 

116See Governance Proposing Release, supra note 

2, at 51831. 

117See id. 

118See id. 

119See id. 120See id. 121See id. 122See, e.g., SIFMA at 3 (stating that it ‘‘supports 

this part of the rule and urges the Commission to 

adopt it . . .’’); Barclays et al. at 2 (stating that 

‘‘[w]hile it is reassuring that all seven of the current 

clearing agencies include participant 

representatives on their RMCs, we believe that the 

codification of this practice into a requirement will 

be beneficial’’); DTCC at 5 (stating that ‘‘DTCC 

generally supports the requirements set forth in 

proposed Rule 17Ad–25(d) regarding the 

establishment and function of a board risk 

committee . . .’’); ICI at 2 (stating that ‘‘[w]hile 

RMCs currently exist at some clearing entities, the 

proposed requirements would promote greater 

consistency and a defined role for these 

committees.’’). 

123See, e.g., DTCC at 5–6; OCC at 8–9. 

124See, e.g., SIFMA AMG at 4–6; Barclays et al. 

at 2. 

125See, e.g., OCC at 8–9 (stating that ‘‘[a] 

requirement that forces a registered clearing agency 

to replace well-informed risk management experts 

with directors relatively unfamiliar with a 

particular matter or the broader risk management 

framework would rob the registered clearing agency 

of critical risk management continuity.’’); CCP12 at 

4–5 (stating that ‘‘[w]hile we agree that it can be 

beneficial for a risk management committee to be 

a board committee . . . we do not support making 

this a requirement . . .’’); ICE at 4 (stating that ‘‘ICE 

supports the Commission’s proposal to require a 

SEC Registered CA to establish a risk management 

committee but disagrees with the requirement that 

a risk management committee be a committee of the 

board.’’). 

126See, e.g., LSEG at 10 (stating that ‘‘this would 

be an effective way to structure the committee. As 

a board sub-committee, the RMC can be formally 

delegated certain authorities and would be subject 

to the same corporate governance regime of the 

company.’’); Saguato at 4 (stating that ‘‘[a] [c]learing 

agency should have one or more risk committee to 

support the board in its operation.’’). 

127 DTCC at 6. 

128See SIFMA at 3 (stating that ‘‘the 

Commission’s specific proposal in this regard will 

help formalize this structure and further foster 

consistent practices across such clearing 

agencies.’’). 

129See ICE at 4 (stating that it ‘‘supports the 

Commission’s proposal to require a SEC Registered 

CA to establish a risk management committee but 

disagrees with the requirement that a risk 

management committee be a committee of the 

board.’’); CCP12 at 4 (stating that ‘‘we do not 

support making this a requirement for all clearing 

agencies, as there are other models that clearing 

agencies use that are also effective.’’). 

experience, and skills useful to the 

nominating committee’s overall 

purpose. 

C. Risk Management Committee 

1. Proposed Rule 17Ad–25(d) 

Proposed Rule 17Ad–25(d)(1) would 

require each registered clearing agency 

to establish a risk management 

committee (or committees) (‘‘RMC’’) to 

assist the board in overseeing the risk 

management of the registered clearing 

agency. Proposed Rule 17Ad–25(d)(1) 

would also require each RMC to 

reconstitute its membership on a regular 

basis and at all times include 

representatives from the owners and 

participants of the registered clearing 

agency. Proposed Rule 17Ad–25(d)(2) 

would require that the RMC, in the 

performance of its duties, be able to 

provide a risk-based, independent, and 

informed opinion on all matters 

presented to it for consideration in a 

manner that supports the safety and 

efficiency of the registered clearing 

agency. 

In the Governance Proposing Release, 

the Commission explained that because 

all registered clearing agencies are 

currently covered clearing agencies and, 

as such, are required to have RMCs as 

a part of their governance arrangements 

under Rule 17Ad–22(e)(3)(iv),115 no 

parallel requirement exists for registered 

clearing agencies that are subject to Rule 

17Ad–22(d).116 The Commission stated 

that because future registered clearing 

agencies that are not covered clearing 

agencies and, as a result, are subject to 

Rule 17Ad–22(d), will also likely face 

risk management issues related to their 

activities, any clearing agency subject to 

Rule 17Ad–22(d) will likely benefit 

from having a RMC.117 Accordingly, the 

Commission proposed Rule 17Ad–25(d) 

so that clearing agencies subject to Rule 

17Ad–22(d) will also be required to 

have RMCs as a part of their governance 

arrangements.118 Additionally, the 

Commission stated that proposed Rule 

17Ad–25(d) would establish more 

defined requirements related to the 

purpose and function of RMCs that Rule 

17Ad–22(e)(3)(iv) does not and that 

specific requirements imposed by 

proposed Rule 17Ad–25(d) would help 

enhance risk management governance 

across all registered clearing 

agencies.119

In the Governance Proposing Release, 

the Commission also stated that it 

recognizes the importance of enabling 

the board to assign certain tasks to a 

board committee to assist the board in 

discharging its ultimate responsibility of 

ensuring the sound risk management of 

the clearing agency.120 The Commission 

stated that for the RMC itself to be 

effective, it must have a clearly defined 

purpose and obligations to the board; 

therefore, the proposed rule would 

require the RMC to provide a risk-based, 

independent, and informed opinion on 

all matters presented to it in a way that 

supports the safety and efficiency of the 

registered clearing agency.121

Commenters generally supported the 

proposed approach to Rule 17Ad– 

25(d).122 However, some commenters 

requested clarifications 123 or 

modifications to the rule.124 Other 

commenters disagreed with certain 

aspects of the rule.125 Proposed Rule 

17Ad–25(d) balances more defined 

requirements with principles-based 

requirements relating to a registered 

clearing agency’s RMC. In keeping with 

this approach and to address requests 

for clarifications and revisions to the 

rule, the Commission adopts Rule 

17Ad–25(d) as proposed, with certain 

modifications. Specifically, Rule 17Ad– 

25(d)(1) has been modified to reflect 

that: (1) the RMC is ‘‘of the board’’ of the 

registered clearing agency; and (2) the 

RMC’s membership must be ‘‘reevaluated annually.’’ Additionally, Rule 

17Ad–25(d)(2) has been modified to 

reflect that the RMC’s work must 

support the ‘‘overall risk management, 

safety and efficiency of the registered 

clearing agency.’’ Rule 17Ad–25(d) 

establishes specific requirements as a 

minimum bar for RMCs across all 

registered clearing agencies while also 

providing registered clearing agencies 

with discretion to consider when and 

how to re-evaluate the RMC 

membership annually and regarding the 

choice of the RMC chair. 

2. RMC of the Board 

Many commenters had understood 

the proposed rule to require a boardlevel RMC, as the Commission had 

intended the rule to require, and 

supported the Commission’s 

approach.126 A commenter requested 

that the Commission clarify in a final 

rule that the board-level RMC is ‘‘not 

merely an advisory body that only 

develops opinions or recommendations 

for full board consideration and 

action.’’ 127 Another commenter stated 

that because risk management should be 

a critical focus of the RMC, the RMC 

should have adequate representation by 

clearing agency participants, and the 

proposed requirement would help 

formalize such a structure and foster 

further consistency across clearing 

agencies.128

Two commenters, however, objected 

to the Commission’s approach that 

would require the RMC to be a boardlevel committee.129 For example, one 

commenter stated that registered 

clearing agencies should be given the 

discretion to structure their RMCs as 

they see fit, whether as a board 

committee or an advisory group with a 

broader membership than the board and 


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130 ICE at 4 (also stating that ‘‘[a] risk committee 

that is not board level can benefit from the expertise 

of a wider range of individuals and thus better 

inform the board than a board level risk committee 

would.’’). 131To address the concern that the board can also 

benefit from input and expertise reflecting a broader 

set of potential stakeholders in the registered 

clearing agency, the Commission is separately 

adopting Rule 17Ad–25(j), as discussed in Part II.F, 

which requires a registered clearing agency to seek 

input from other relevant stakeholders, such as the 

customers of clearing agency participants, regarding 

its risk management and operations. 

132See Governance Proposing Release, supra note 

2, at 51831. 

133See id. 

134 DTCC at 6. 

135See LSEG at 10 (stating that ‘‘. . . this would 

be an effective way to structure the committee. As 

a board sub-committee, the RMC can be formally 

delegated certain authorities . . .’’); CCP12 at 5 

(stating that ‘‘[o]ur view is that board-level RMCs 

may be delegated authority by the board to 

proactively address certain aspects of risk 

management. This is in line with generally accepted 

corporate governance principles.’’). 

136See ICE at 4. 

137See Governance Proposing Release, supra note 

2, at 51831. 

138See id. 

139See id. 

140See, e.g., OCC at 8 (stating that ‘‘[w]e believe 

a forced reconstitution on a regular basis would 

frustrate the Commission’s goal . . . as registered 

clearing agencies may be required to remove 

directors from the risk management committee(s) 

with deep industry and subject matter experience 

to meet this requirement.’’); ISDA at 3–4 (stating 

that ‘‘a situation where the CCP spends a 

considerable part of RMC meetings on educating 

new RMC members should be avoided.’’); CCP12 at 

6 (stating that ‘‘RMC members often serve because 

they have specialized expertise or a familiarity with 

the intricacies of a clearing agency’s risk 

management framework that would merit a longer 

term.’’); ICE at 4–5 (stating that ‘‘reconstitution 

requirements must consider the value an 

experienced and knowledgeable risk management 

committee member provides to a clearing agencies’ 

risk management function.’’). 

141See DTCC at 6 (stating that ‘‘[i]nstead, we 

would suggest that that the Commission consider 

alternative terms such as ‘reevaluate’ ’’). 

142See, e.g., ISDA at 3–4 (stating that ‘‘staggered 

rotation system . . . allows to have new members 

on while still retaining institutional knowledge.’’); 

SIFMA AMG at 5–6 (stating that ‘‘[i]t will be 

important that the requirement is principles-based, 

is subject to the requirement for the inclusion of 

clearing members and clearing member customers, 

applies the recommended fitness standards, and 

requires a staggered rotation . . .’’). 

143See DTCC at 6 (requesting that the 

Commission consider registered clearing agencies to 

‘‘periodically evaluate whether the risk committee 

membership and structure continues to provide 

current, diverse and expert risk management 

oversight that supports the safety and efficiency of 

the clearing agency’’). 

with requisite expertise in risk 

management matters, stating it does not 

view that ‘‘a board level risk 

management committee . . . improve[s] 

the board’s engagement with clearing 

agency risk management, nor is there 

any evidence that it makes a board’s 

oversight of management’s decisions 

more effective.’’ 130

In response to commenters, the 

Commission is modifying Rule 17Ad– 

25(d)(1) to specify that the RMC is ‘‘of 

the board’’ to make clear that the RMC 

is not merely an advisory board. The 

Commission is modifying Rule 17Ad– 

25(d)(2) to specify that the RMC’s work 

supports the ‘‘overall risk management, 

safety and efficiency of the clearing 

agency.’’ 131 The Commission disagrees 

with the commenter’s suggestion that 

requiring registered clearing agencies to 

structure their RMCs as board-level 

committees would not make a board’s 

oversight of management’s decisions 

more effective. As stated in the 

Governance Proposing Release, a RMC 

of the board is a more effective way to 

help ensure that the board is engaged 

with and informed of the ongoing risk 

management of the clearing agency, 

because a dedicated committee of the 

board remains focused exclusively on 

matters related to risk management.132

One reason that a board-level RMC is a 

more effective structure for the 

registered clearing agency’s risk 

management decisions lies in the fact 

that such RMC is directly answerable to 

the board; requiring registered clearing 

agencies to establish a RMC of the board 

would help ensure that the board can 

more effectively oversee management’s 

decisions concerning matters that 

implicate the clearing agency’s risk 

management, including its policies, 

procedures, and tools for mitigating 

risk.133 As one commenter stated, boardlevel RMCs of registered clearing 

agencies ‘‘do not function in such a 

passive manner, but instead act 

pursuant to delegated authority from the 

full board to evaluate and take risk 

management decisions directly . . . . 

allowing for this balancing of roles and 

responsibilities between the two bodies 

[of the RMC and the board] enhances 

the clearing agency’s ability to evaluate 

and respond in a timely manner to 

evolving risks and other changes in the 

relevant cleared market.’’ 134 While the 

board may or may not take the 

recommendations of an advisory group, 

RMCs generally have delegated 

authority from the board to conduct 

oversight and make decisions regarding 

risk management, as most commenters 

have observed,135 pursuant to a charter 

or other governing document specifying 

its purpose and its delegation of 

authority from the board. 

Notwithstanding the above, the 

requirement for a board-level RMC in no 

way precludes the establishment or use 

of an advisory committee composed of 

non-board members, as the commenter 

has suggested.136

In addition, Rule 17Ad–25(d) 

specifies that, in the performance of its 

duties, the RMC must be able to provide 

a risk-based, independent, and informed 

opinion on all matters presented to it in 

a manner that supports the overall risk 

management, safety and efficiency of 

the registered clearing agency. As 

discussed in the Governance Proposing 

Release,137 this requirement helps 

ensure that the RMC has a clear scope 

and sufficient direction to effectively 

address risk management-related 

matters and not merely serve as a 

‘‘rubber stamp’’ for recommendations 

presented to it by management.138 In 

this sense, it is neither advisory in its 

review of management’s decisions nor 

advisory in its recommendations 

provided to the board. As a general 

matter, based on its supervisory 

experience, the Commission has 

observed that the boards of registered 

clearing agencies often give 

considerable deference to the 

recommendations, advice, and opinions 

of their RMCs. The Commission 

continues to believe that it is 

appropriate for the board, while 

retaining ultimate responsibility over 

risk management, to assign certain tasks 

to the RMC (and other committees) to 

assist the board in discharging its 

ultimate responsibility.139

3. Annual Requirement To Re-Evaluate 

RMC Membership 

Several commenters disagreed with 

the Commission’s approach to require 

RMC membership reconstitution on a 

regular basis, as proposed in Rule 

17Ad–25(d)(1), because doing so could 

remove individuals with useful subject 

matter expertise and institutional 

knowledge required for the RMC to be 

effective.140 One commenter suggested 

alternative language for a different 

approach, requesting that the 

Commission modify the proposed rule 

to require the registered clearing agency 

to ‘‘reevaluate’’ the composition of the 

RMC rather than ‘‘reconstitute,’’ as 

proposed.141 Some commenters 

proposed a staggered rotation system 

with term limits, as well as fitness 

standards.142 Another alternative 

suggested by a commenter is to have the 

clearing agency use an outcomes-based 

approach to review the work of the RMC 

and prevent it from becoming nonrepresentative or entrenched.143

Another commenter suggested annual 

review of the membership is sufficient 

and also requested that the Commission 

clarify whether membership refers to 


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144See LSEG at 12 (stating that ‘‘it should be 

sufficient for a clearing agency to regularly (e.g., 

annually) review the membership of its RMC to 

ensure there is sufficient representation of its 

participants.’’). 

145See Governance Proposing Release, supra note 

2, at 51832–33. 

146See id. 

147See id. 

148See id. 149See id. 150See Governance Proposing Release, supra note 

2, at 51833. 151See, e.g., CCP12 at 5 (stating that ‘‘additional 

requirements may make the governance of RMCs 

more burdensome and inefficient, which could 

potentially have a negative impact on the 

functioning of the committee.’’); ICE at 5 (advising 

‘‘against mandating specific risk management 

committee composition requirements, such as a 

specific percentage or number of representatives 

from small participants.’’). 

152See, e.g., Better Markets at 21 (stating that 

‘‘diversity needs to be genuine and can only be 

strengthened by guaranteeing enough 

representation for smaller entities to check the 

largest players.’’); IDTA at 4–5 (recommending that 

‘‘that the rule include a requirement to ensure 

sufficient representation on the risk committees of 

non-SIFI entities (smaller and middle-market 

firms).’’). 

153See IDTA at 5. 

154See LSEG at 11 (stating that ‘‘[w]e do not 

believe that small participants should be 

systematically represented since very small 

participants may not have this expertise, nor the 

required involvement’’). 

155LSEG at 10. 

156Saguato at 4 (stating that ‘‘[i]n actuality a dual 

level risk committee structure would be 

theoretically ideal as it would better incorporate 

inputs from the many constituencies of a clearing 

agency’’). 

157See infra Part II.F (further discussing the 

requirements of Rule 17Ad–25(j)). 

158See OCC at 9 (requesting the Commission 

‘‘clarify that one representative from each of the 

owners and the participants of the registered 

clearing agency would satisfy the requirement of 

Proposed Rule 17Ad–25(d)(1) . . . . [and] that a 

risk management committee(s) may provide such an 

independent opinion so long as a majority of 

participating directors on the committee(s) are 

themselves independent.’’). 

159See, e.g., Governance Proposing Release, supra 

note 2, at 51831; see also id. at 58132 (‘‘Because the 

risks a clearing agency faces will vary depending on 

the products it clears and the markets it serves, the 

Commission believes that a clearing agency should 

have discretion to determine the appropriate 

qualifications and expertise needed for the risk 

management committee to provide an informed 

opinion.’’). 

participant firms or individuals 

representing them.144

The Commission is modifying Rule 

17Ad–25(d)(1) to require an annual reevaluation of the RMC. Having 

considered the comments received, the 

Commission agrees that a required 

reconstitution of the RMC on a regular 

basis could lead to the undesired 

outcome of turnover in the committee 

membership before members are able to 

contribute optimally, with a loss of 

continuity and expertise. In this way, 

the modification to Rule 17Ad–25(d)(1) 

reflects an outcomes-based approach. As 

registered clearing agencies may have 

different methods of term limits, 

including staggered rotation, the 

Commission leaves the frequency and 

type of reconstitution to the discretion 

of the registered clearing agency, while 

at the same time requiring a reevaluation to be conducted annually. 

Rule 17Ad–25(d), as modified, will 

preserve the initial intent of the rule— 

to prevent stagnation of the RMC 

membership, while also allowing 

registered clearing agencies flexibility 

and discretion in the composition of the 

RMC. As stated in the Governance 

Proposing Release, many registered 

clearing agencies have established 

policies and procedures for governance 

arrangements that help promote 

participation from a broader array of 

owners and participants on the RMC 

through the use of RMC membership 

changes.145 The Commission continues 

to believe that codifying this practice 

will set a minimum standard for reevaluation of the RMC membership.146

Requiring the registered clearing agency 

to re-evaluate the RMC membership 

annually helps ensure that a broad range 

of owners and participants will be able 

to provide their risk management 

expertise and participate in the 

decision-making of the RMC over 

time.147 As stated in the Governance 

Proposing Release, the Commission 

continues to believe that Rule 17Ad– 

25(d)(1) achieves the above objective of 

ensuring a broad range of participation 

on the RMC without imposing specific 

obligations related to owners, 

participants, or independent directors 

that may be suitable in some, but not 

necessarily all, cases, and because the 

RMC is broadly responsible for 

providing recommendations to the 

board on all risk management related 

matters, it is important that the RMC’s 

membership reflects a wide range of 

owners and participants with relevant 

experience and expertise on a variety of 

risk management issues.148 By requiring 

the RMC to re-evaluate its membership 

annually, Rule 17Ad–25(d)(1), as 

modified, helps ensure ongoing 

diversity of perspectives across owners 

and participants and expertise on the 

RMC, while better ensuring that the 

RMC is not subject to stagnation of 

views that neither serves the safety and 

efficiency of the registered clearing 

agency in its risk management decisionmaking nor promotes effective and 

reliable risk management practices at a 

registered clearing agency.149 As stated 

in the Governance Proposing Release, 

the charter that defines the terms of the 

RMC could also establish that RMC 

members serve for a specified term, or 

that the RMC would rotate or replace 

directors on the RMC at certain intervals 

absent a specified turnover threshold 

among directors, or that their terms 

could be staggered to have regular 

turnover of participants and other RMC 

members.150

Although some commenters 

recommend against the Commission 

requiring a certain percentage or 

number of small participant 

representatives on the RMC,151 a few 

commenters requested substantive 

modifications to the rule that would 

address RMC composition 

requirements.152 One commenter 

suggested requiring directors serving on 

the RMC be individuals selected from 

smaller clearing agency participants,153

although another commenter stated that 

obtaining a broad range of perspectives 

is not necessary.154 This commenter 

suggested that the Commission go 

further and that the RMC of the board 

‘‘should be structured to represent more 

participants than the board . . . [and] 

neither clearing members or clients of 

clearing members should represent a 

majority.’’ 155 One commenter suggested 

that ‘‘a majority of the [RMC] should be 

composed of independent directors,’’ 

and that ‘‘a dual-level [RMC] structure 

would be theoretically ideal.’’ 156 With 

regard to this comment, requiring a 

board-level RMC pursuant to Rule 

17Ad–25(d) in conjunction with 

requiring the registered clearing agency 

to solicit and document stakeholder 

viewpoints pursuant to Rule 17Ad–25(j) 

is fully consistent with the commenter’s 

recommendation of a ‘‘dual-level’’ 

structure, in which the board-level RMC 

acts with delegated authority from the 

board on risk management issues while 

the registered clearing agency is 

required to solicit stakeholder views 

from representatives of clearing agency 

participants, their customers, other end 

users, and any other relevant 

stakeholders.157 Another commenter 

requested clarification from the 

Commission on RMC composition 

requirements and the reference to 

‘‘independent’’ opinion in Rule 17Ad– 

25(d)(2).158

With regard to other comments on 

specifying RMC membership 

composition, the Commission is not 

modifying Rule 17Ad–25(d) to require 

that the RMC be composed of majority 

independent directors because such 

requirement may exclude too many 

directors with specialized technical 

expertise from the pool of directors 

eligible to serve on the RMC, as 

previously considered and discussed in 

the Governance Proposing Release.159

However, pursuant to the requirements 


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160See id. at 51831 (emphasis added). 

161See id. 

162See id. 

163See id. 

164See id. 

165See id. 

166See 17 CFR part 39; see also CFTC Final Rule: 

Governance Requirements for Derivatives Clearing 

Organizations, 88 FR 44675 (July 13, 2023) (CFTC 

adopting amendments to its rules to require DCOs 

to establish and consult with one or more RMCs 

composed of clearing members and customers of 

clearing members on matters that could materially 

affect the DCO’s risk profile, minimum 

requirements for RMC composition and rotation, 

and requiring DCOs to establish and enforce fitness 

standards for RMC members; also adopting 

requirements for DCOs to maintain written policies 

and procedures governing the RMC consultation 

process and the role of RMC members; also 

adopting requirements for DCOs to establish one or 

more market participant risk advisory working 

groups (RWGs) that must convene at least two times 

per year, and adopt written policies and procedures 

related to the formation and role of the RWG). 

167See, e.g., ICI at 5 (stating that ‘‘[h]armonization 

would promote consistency, certainty, and 

efficiency in how clearing entities—especially 

CFTC and SEC dual-registrants—manage risk by 

detailing the process by which the board consults 

and obtains an RMC’s input.’’); CCP12 at 6 

(encouraging the Commission and the CFTC ‘‘to 

coordinate . . . . [by] adopt[ing] a flexible 

outcomes-based approach in which the clearing 

agency would periodically evaluate whether the 

RMC membership is appropriately expert, diverse 

and current in terms of tenure.’’); ICE at 5 (urging 

‘‘coordination and harmonization’’). 

168See Barclays et al. at 2 (recommending ‘‘[o]ne 

approach to addressing this conflict would be to 

require RMC members to also consider the safety 

and efficiency of the broader financial markets, 

rather than solely the registered clearing agency.’’); 

SIFMA AMG at 5 (recommending the Commission 

‘‘explicitly state that in addition to supporting the 

safety and efficiency of the RCA, RMC and RWG 

members should also support the stability of the 

broader financial system’’); see also 17 CFR 

39.24(c)(1)(iv)(3) (‘‘A derivatives clearing 

organization shall maintain policies designed to 

enable members of risk management committee(s) 

to provide informed opinions in the form of riskbased input on all matters presented to the risk 

management committee for consideration, and 

perform their duties in a manner that supports the 

safety and efficiency of the derivatives clearing 

organization and the stability of the broader 

financial system.’’). 

169See Governance Proposing Release, supra note 

2, at 51831. 

170See Committee on Payment and Settlement 

Systems (‘‘CPSS’’) and Technical Committee of the 

International Organization of Securities 

Commissions (‘‘IOSCO’’), Principles for financial 

market infrastructures (Apr. 16, 2012), at 5, 

available at http://www.bis.org/publ/cpss101a.pdf 

(‘‘PFMI’’) (stating that ‘‘[f]inancial market 

infrastructures that facilitate the clearing, 

settlement, and recording of monetary and other 

financial transactions can strengthen the markets 

they serve and play a critical role in fostering 

financial stability.’’). In 2014, the CPSS became the 

Committee on Payments and Market Infrastructures 

(‘‘CPMI’’). 

of Rule 17Ad–25(e), if the RMC has the 

authority to act on behalf of the board 

of directors, the composition of that 

committee must have at least the same 

percentage of independent directors as 

is required for the board of directors. 

The Commission continues to believe 

that, by requiring the RMC to provide an 

independent opinion, irrespective of its 

composition, Rule 17Ad–25(d) helps 

ensure that the RMC is free from 

influence in the performance of its 

duties.160 In response to commenters’ 

request to clarify the reference to 

‘‘independent’’ opinion, ‘‘independent’’ 

here refers to the nature of the opinion 

and does not mean independent in the 

same context as the requirements 

discussed in Part II.A for ‘‘independent’’ 

directors; when making 

recommendations to the board, the 

RMC’s decisions or opinions must be its 

own—not a rubber stamp of 

management’s decisions or opinions— 

so that the RMC is free from influence 

in the performance of its duties to 

reflect how its decisions support the 

safety and efficiency of the clearing 

agency and represent the best interests 

of the clearing agency.161 The 

requirement to include directors on the 

committee representative of both 

owners and participants, without also 

providing further specificity as to the 

size (or market power) of the 

participants so included, is consistent 

with the requirements set forth in Rule 

17Ad–25(c)(4) regarding the nomination 

of directors by the nominating 

committee more generally. Specifically, 

those requirements establish that the 

nominating committee shall consider, 

when selecting nominees for director, 

representation on the board as a whole 

that reflects a range of participants with 

different business strategies, models, 

and sizes, as further discussed in Part 

II.B.3. 

The Governance Proposing Release 

also stated that clearing agencies will 

benefit from the diverse perspectives 

and expertise that representatives from 

owners and participants can provide, 

which enhances the effectiveness of 

their risk management practices, and so 

Rule 17Ad–25(d) requires that RMCs at 

all times include representatives from 

the owners and participants of the 

registered clearing agency.162 As 

discussed in the Governance Proposing 

Release, these representatives would be 

persons who have a relationship with 

the clearing agency’s owners and 

participants, such as employees of the 

owners and participants or those who 

have an ownership interest in the 

owners and participants.163 Based on its 

supervisory experience, the Commission 

continues to believe that, because 

representatives from a clearing agency’s 

owners and participants will likely have 

an understanding of the clearing 

agency’s operations and procedures, as 

well as the complex risk management 

issues that the clearing agency’s board 

must consider, requiring the RMC to 

include representatives from the 

clearing agency’s owners and 

participants helps ensure that the RMC’s 

recommendations to the board reflect 

these stakeholders’ unique perspectives 

and expertise on risk management 

issues.164

Accordingly, the rule provides a 

registered clearing agency with some 

discretion to determine the appropriate 

composition for the RMC with respect to 

representation from its owners and 

participants. The RMC generally should 

include representation reflective of both 

small and large participants, and the 

affirmative Commission requirements 

reflected in the selection process for 

directors generally under Rule 17Ad– 

25(c) would better ensure appropriate 

representation of a diverse set of 

stakeholder viewpoints.165 Therefore, 

the Commission is not modifying the 

proposed rule in response to these 

commenters. 

4. Harmonization With CFTC and EMIR 

Requirements 

Some commenters recommended that 

the Commission harmonize Rule 17Ad– 

25(d) with CFTC requirements for the 

RMCs of DCOs,166 particularly for 

entities dually registered as DCOs with 

the CFTC and registered clearing 

agencies with the Commission.167

Specifically, some commenters 

suggested the Commission clarify the 

expected perspective to be applied by 

RMC members to support not just the 

safety and efficiency of the clearing 

agency, as required in Rule 17Ad– 

25(d)(2), but also the stability of the 

broader financial system.168

The Commission is adopting the 

proposed rule without modification 

because the goal of safety and efficiency 

of the clearing agency is not mutually 

exclusive with that of overall financial 

stability. As stated in the Governance 

Proposing Release, in providing riskbased opinions, the RMC must focus on 

both the risks that the clearing agency 

faces and the tools at its disposal to 

mitigate and address such risks in its 

aim toward the goal of supporting the 

safety and efficiency of the clearing 

agency itself.169 The stability of clearing 

agencies is an essential part of the 

stability of the overall financial system 

and the markets that clearing agencies 

serve.170 Therefore, the Commission is 

not modifying Rule 17Ad–25(d)(2) as 

suggested by commenters. 

Additionally, one commenter 

requested that the Commission adopt 

the list of factors specified in CFTC 

requirements for DCO RMCs by 

explicitly requiring a registered clearing 


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171See SIFMA AMG at 5–7 (requesting the 

Commission ‘‘explicitly require that the RCA 

[registered clearing agency] present to the RMC and 

RWG all matters and proposed changes to the RCA’s 

rules, procedures, or operations that could 

materially affect the risk profile of the RCA, 

including, but not limited to, any material change 

to the RCA’s risk model, default procedures, 

participation requirements, and risk management 

practices, as well as the clearing of new products 

that could significantly impact the RCA’s risk 

profile’’). 

172See id. 

173 IDTA at 4–5. 

174See LSEG at 11 (stating that ‘‘[i]t is not 

necessary for the SEC to define the matters to be 

presented to the RMC and be overly prescriptive. 

Requiring that clearing agencies are explicit in the 

committee Terms of Reference (‘TOR’) would meet 

the SEC’s objective . . .’’). 

175See ISDA at 4 (stating that ‘‘[i]t will be 

difficult to clearly specify in detail all matters that 

have to be presented to the RMC.’’). 

176See Governance Proposing Release, supra note 

2, at 51831 (stating that ‘‘[t]he proposed rule is 

intended to specify the role of the risk management 

committee by stating the committee’s purpose— 

namely, to provide a risk-based, independent, and 

informed opinion on all matters presented to it in 

a way that supports the safety and efficiency of the 

registered clearing agency.’’). 

177 Id. 

178 15 U.S.C. 78s(b)(3)(A). 

179See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. 

180See Stephen John Berger, Managing Director, 

Global Head of Government & Regulatory Policy, 

Citadel (Oct. 7, 2022) (‘‘Citadel’’) at 1. 

181See Governance Proposing Release, supra note 

2, at 51812 (stating that ‘‘[t]he proposed rules would 

identify certain responsibilities of the board, 

increase transparency into board governance, and, 

more generally, improve the alignment of incentives 

among owners and participants of a registered 

clearing agency’’). 

182See LSEG at 10 (stating that ‘‘independent 

directors are required under EMIR, hence LCH SA 

does not rely solely on experts from the participants 

and owners of the clearing agency. The INEDs 

selected for the Risk Management Committee 

(‘RMC’) must have good risk knowledge, and we 

support the RMC being chaired by an INED.’’). 

183See OCC at 9 (requesting clarification that an 

RMC ‘‘may provide such an independent opinion 

so long as a majority of participating directors on 

the committee(s) are themselves independent.’’). 

184See Governance Proposing Release, supra note 

2, at 51831 (stating that ‘‘the proposed rule helps 

ensure that the committee is free from influence in 

the performance of its duties.’’). 

185See id. 

agency to present to the RMC and any 

advisory committee or RWG all matters 

regarding, and proposed changes to, the 

registered clearing agency’s rules, 

procedures, or operations that could 

materially affect the risk profile of the 

registered clearing agency, including, 

but not limited to, any material change 

to the registered clearing agency’s risk 

model, default procedures, participation 

requirements, and risk management 

practices, as well as the clearing of new 

products that could significantly impact 

the clearing agency’s risk profile.171

According to the commenter, ‘‘the 

greater detail we have recommended is 

important to ensure the requirements 

are clear, that the views of clearing 

member customers are included, that 

the board must engage with the RMC, 

and that issues of material risk must be 

brought to the RMC and RWG for 

consideration.’’ 172 Additionally, 

another commenter suggested that ‘‘the 

requirements for the function, 

composition, and reconstitution should 

specifically include considerations of 

concentration of risk in the markets, 

competitiveness of the markets, and the 

impact of policies on 

competitiveness.’’ 173 However, one 

commenter stated that listing factors for 

RMC consideration would be overly 

prescriptive,174 while another 

commenter stated that listing all matters 

for RMC consideration would be 

difficult.175

The Commission is not modifying the 

proposed rule by adopting the CFTC 

DCO list of factors for RMC 

consideration into Rule 17Ad–25(d). In 

the Governance Proposing Release, the 

Commission explained that the purpose 

of the RMC is to ‘‘provide risk-based, 

independent, and informed opinion on 

all matters presented to it for 

consideration in a manner that supports 

the safety and efficiency of the 

registered clearing agency’’—matters 

that implicate the clearing agency’s risk 

management, including its policies, 

procedures, and tools for mitigating 

risk.176 The Commission further stated 

that Rule 17Ad–25(d) ‘‘helps ensure that 

the committee has a clear scope and 

sufficient direction to more effectively 

address risk management related 

matters, regardless of the participants, 

markets, and products that a clearing 

agency serves.’’ 177 Explicitly 

enumerating the matters presented to 

the RMC, as suggested by commenters, 

would be unnecessarily prescriptive, 

and that the individual clearing 

agencies are best qualified to determine 

the matters presented to the board based 

on the specifics of their participants, 

markets and products. Additionally, 

whereas the CFTC considers DCO 

policies and procedures under a selfcertification process, the SEC requires 

that registered clearing agencies submit 

to the Commission for approval, after a 

public comment period, certain policies 

and procedures—including policies and 

procedures related to the level of risks 

faced by the registered clearing 

agency—under the SRO rule filing 

process for registered clearing agencies, 

except for certain rule changes that are 

immediately effective upon filing as set 

forth in Exchange Act section 

19(b)(3)(A) 178 and 17 CFR 240.19b– 

4(f).179 Not only are the financial risk 

management matters referred to by the 

commenters subject to the SRO rule 

filing process, registered clearing 

agencies designated as systemically 

important financial market utilities 

(‘‘SIFMUs’’) are required to file 60-days 

advance notice of changes to rules, 

procedures, and operations that could 

materially affect the nature or level of 

risk presented by the SIFMU. 

In a similar vein, a commenter 

suggested that the Commission assess 

how greater predictability and 

transparency can be provided to market 

participants regarding margin 

methodologies as part of a clearing 

agency’s governance process to assist 

market participants in managing their 

liquidity needs and minimize the risk of 

market disruptions.180 The Commission 

agrees that predictability and 

transparency of margin requirements 

can help clearing members better 

manage their liquidity and other market 

risks. The focus of this rulemaking 

regarding transparency is to ‘‘increase 

transparency into board governance,’’ 

rather than into the specific margin 

methodologies. In fact, improved 

governance could generally lead to more 

transparent margin methodologies. 

Accordingly, the Commission is not 

modifying the rule in response to this 

comment.181

One commenter urged the 

Commission to harmonize Rule 17Ad– 

25(d) with EMIR, which requires that an 

RMC be chaired by an independent 

director.182 Another commenter 

requested clarification that a risk 

committee with some non-independent 

members can still provide overall 

independent opinions to the board.183

The Commission is not modifying the 

rule as suggested by commenters. Rule 

17Ad–25(d)(2) requires that the RMC 

‘‘be able to provide a risk-based, 

independent, and informed opinion on 

all matters presented to the committee 

for consideration.’’ This opinion on risk 

matters brought before the RMC can be 

independent without an explicit 

prescriptive requirement that the RMC 

is chaired by an independent 

director.184 The rule’s focus is on RMC 

decisions and opinions being free of 

influence from management by virtue of 

being a board-level committee, not the 

chair’s independence in the context of 

the requirements in Rule 17Ad–25(b), 

because at the heart of the rule is the 

safety and efficiency of the registered 

clearing agency, and critical to the 

effective functioning of a registered 

clearing agency is the board’s ability to 

understand and engage with the risks 

that a registered clearing agency faces 

and the risk management practices it 

employs to mitigate those risks.185 With 

respect to registered clearing agencies, it 


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186Cf. Governance Proposing Release, supra note 

2, at 51830–31. 

187See id. at 51831. 

188See LSEG at 11 (stating that ‘‘it is important 

that members of the RMC have necessary levels of 

expertise to make effective risk decisions and 

provide sound advice. Further, owners are not 

permitted to be on the RMC under EMIR, which 

will create a conflict for dually registered clearing 

agencies.’’). 

189See EMIR, supra note 56. 

190EMIR Article 28(1) provides: ‘‘A CCP shall 

establish a risk committee, which shall be 

composed of representatives of its clearing 

members, independent members of the board and 

representatives of its clients . . . The advice of the 

risk committee shall be independent of any direct 

influence by the management of the CCP. None of 

the groups of representatives shall have a majority 

in the risk committee.’’ 

191See Release No. 34–90492 (Nov. 23, 2020), 85 

FR 76635 (Nov. 30, 2020) (‘‘CCP Statement’’). In the 

CCP Statement, the Commission explained (i) that 

it would take substantially the same approach for 

other jurisdictions that have adopted a regulatory 

framework substantially similar to EMIR, and (ii) 

that the policy and guidance provided also would 

apply to CCPs for securities products other than 

security-based swaps. See id. at nn.1 & 23. 

192See Barclays et al. at 3 (stating that ‘‘[w]e 

believe that the proposed rules should include 

explicit provisions that allow RMC members to 

obtain feedback from experts within their member 

firms which will enhance the quality of input the 

registered clearing agencies receive from RMC 

members’’). 193See ISDA at 4. 

is critically important that the chair of 

the RMC, which generally sets the 

agenda for and prioritizes the work of 

the RMC, has a high level of expertise 

in, and familiarity with, the risk 

management topics likely to come 

before the RMC for its review and 

opinion. In this regard, the expertise 

required to chair the RMC of a registered 

clearing agency to ensure that the RMC 

provides risk-based, independent, and 

informed opinions for the proper 

functioning and effectiveness of the 

RMC is more important than requiring 

that the chair of the RMC be 

independent subject to the requirements 

of Rules 17Ad–25(b), (e), and (f) because 

clearing agencies perform a unique and 

often systemically important function 

that facilitates effective risk 

management in the U.S. securities 

markets.186 As stated in the Governance 

Proposing Release, by requiring the 

RMC to provide an independent 

opinion, ‘‘irrespective of its 

composition,’’ the rule would help 

ensure that the RMC is free from 

influence in the performance of its 

duties.187

One commenter stated that the RMC 

composition requirements in Rule 

17Ad–25(d) conflict with the 

composition requirements for the RMC 

set forth in EMIR.188 Contrary to the 

commenter’s view, Rule 17Ad–25(d) can 

be read consistently with EMIR. Article 

28 of EMIR states, ‘‘A CCP shall 

establish a risk committee, which shall 

be composed of representatives of its 

clearing members, independent 

members of the board and 

representatives of its clients.’’ It further 

states that, ‘‘The advice of the risk 

committee shall be independent of any 

direct influence by the management of 

the CCP.’’ 189 By comparison, Rule 

17Ad–25(d) requires that the RMC be a 

board-level committee and that it at all 

times include representatives from the 

owners and participants of the 

registered clearing agency. The 

commenter indicated that ‘‘owners are 

not permitted to be on the RMC under 

EMIR,’’ but Article 28 of EMIR as 

described here suggests that only 

management is barred from direct 

representation on the RMC.190 Even if 

the commenter is correct that owners 

are not permitted to be on the RMC 

under EMIR, Rule 17Ad–25(d) does not 

require that management serve on the 

RMC; nor does it require that owners 

serve as directors on the RMC. Rather, 

Rule 17Ad–25(d) requires that the 

composition of the RMC include 

representatives of owners (and 

participants). A non-independent 

director may serve as a representative of 

owners without being part of 

management or an owner of the clearing 

agency; for example, such a director 

could be non-management and a nonowner who nonetheless maintains a 

material relationship with the registered 

clearing agency, or that falls within a 

specific exclusion set forth in Rule 

17Ad–25(f). For this reason, the 

Commission is not modifying Rule 

17Ad–25(d) to address the comment. 

Nonetheless, to the extent that a 

registered clearing agency identifies 

facts or circumstances that clearly 

demonstrate a requirement under Rule 

17Ad–25 is in direct conflict with a 

requirement of EMIR, the Commission 

has previously provided guidance as to 

how such a registered clearing agency 

can request an exemption from said 

requirement.191

5. Other Comments 

One commenter requested that Rule 

17Ad–25(d) include an explicit 

provision that allows directors on the 

RMC to obtain feedback from experts 

within their ‘‘member firms,’’ to 

enhance the quality of input the 

registered clearing agencies receive from 

directors on the committee.192 As a 

general matter, directors on the RMC 

should be fully qualified to serve 

without having to rely on expertise from 

others, such as other personnel at their 

employer firm (i.e., a clearing agency 

participant), to provide input on risk 

management decisions before the RMC. 

The more appropriate venue for 

providing the input described by the 

commenter is via the structure 

established in Rule 17Ad–25(j), as 

discussed in Part II.F, pursuant to which 

a relevant stakeholder would provide 

such input in response to solicitations 

of stakeholder viewpoints by the 

registered clearing agency. Ultimately, 

the ability of directors to consult with 

their primary employers on risk 

management matters will be governed 

by the specific governing documents of 

the clearing agency, its board, and any 

obligations as to confidentiality or 

information sharing that the registered 

clearing agency imposes through those 

documents on directors. Accordingly, 

the Commission is not modifying Rule 

17Ad–25(d) to specifically permit 

directors on the RMC to consult with a 

clearing agency participant. 

Additionally, one commenter 

requested that Rule 17Ad–25(d) go 

further by detailing additional RMC 

requirements, including requirements 

that: (1) registered clearing agencies 

create and maintain minutes or other 

documentation of RMC meetings that 

should be made available to the 

Commission and a summary of which 

that is made public; (2) the RMC 

document and share with regulators any 

dissenting RMC views with regard to the 

clearing agency’s material risk decisions 

or the clearing agency not following the 

advice of the RMC, as well as the 

accompanying rationale for not 

accommodating dissenting views; and 

(3) the RMC meet on a regular basis and 

at least quarterly.193 The Commission is 

not modifying Rule 17Ad–25(d) as 

suggested by the commenter in 

recognition that each entity has 

particular policies and needs, and that 

there could be different ways to 

accomplish the rule’s objectives. The 

Commission designed Rule 17Ad–25(d) 

to balance establishing a common set of 

minimum standards on RMCs across 

registered clearing agencies while still 

providing registered clearing agencies 

with discretion to design the RMC to be 

most effective at conducting its risk 

management function. The Commission 

believes that registered clearing agencies 

currently are capable of determining 

how to apply these factors for the 

operation of their respective RMCs, and 

will continue to consider whether the 

Commission’s objectives are being met 

and whether further rulemaking in this 

area is appropriate. 


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194 Governance Proposing Release, supra note 2, 

at 51834. 

195 Id. 

196 Id. 

197 Id. 

198 Id. 

199 Id. at 51835. 

200 Id. 

201 Id. 

202See, e.g., Better Markets at 22 (stating that 

‘‘[w]e commend the Proposal for requiring written 

policies to identify, document, disclose, and 

mitigate conflicts of interest’’); DTCC at 3–4 (stating 

that it ‘‘generally finds that the requirements laid 

out in proposed Rules 17Ad–25(g) and (h) regarding 

conflicts of interest also are appropriately designed, 

and therefore recommends that they be adopted 

without further modification’’); Chris Barnard at 2 

(stating that ‘‘[p]roposed Rule 17Ad–25(g) . . . I 

agree with this. . . . I also agree with proposed 

Rule 17Ad–25(h)’’); ICE at 5 (stating that it 

‘‘welcomes such approach and believes it would 

provide SEC Registered CAs with the flexibility 

necessary for effective governance by allowing such 

clearing agencies the discretion to design policies 

that fit their particular structure and 

characteristics’’); LSEG at 13 (stating that ‘‘[t]he 

clearing agency should have policies and 

procedures in place to address conflicts of 

interest. . . . [and] should leverage the conflicts 

identified by the SEC to build its own policy’’); 

IDTA at 5 (stating that ‘‘[r]equiring clearing agencies 

to adopt policies and procedures with respect to the 

management of conflicts is instrumental to 

maintaining a sound regulatory framework’’). 

203See DTCC at 3–4; ICE at 5; LSEG at 13. 

204See, e.g., Better Markets at 22; IDTA at 5. 

205See Better Markets at 22 (stating that ‘‘[f]irst, 

the Proposal is vague on exactly how a clearing 

agency should ‘mitigate or eliminate’ conflicts. It 

should instead specify that agency policies should 

require recusal unless or until a conflict has been 

fully eliminated. Second, the . . . double layer of 

reasonableness review seems unnecessary and 

likely to be too generous towards clearing agencies 

and their boards. The Proposal should instead 

require clearing agencies to affirmatively oblige 

directors to disclose any material relationships’’). 

206See id. 

207 Governance Proposing Release, supra note 2, 

at 51834. 

208See id. 

D. Conflicts of Interest 

1. Proposed Rules 17Ad–25(g) and (h) 

Proposed Rule 17Ad–25(g) would 

require each registered clearing agency 

to establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to identify and 

document existing or potential conflicts 

of interest in the decision-making 

process of the clearing agency involving 

directors or senior managers of the 

registered clearing agency; and mitigate 

or eliminate and document the 

mitigation or elimination of such 

conflicts of interest. Additionally, 

proposed Rule 17Ad–25(h) would 

require registered clearing agencies to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to require a 

director to document and inform the 

registered clearing agency promptly of 

the existence of any relationship or 

interest that reasonably could affect the 

independent judgment or decisionmaking of the director. 

In the Governance Proposing Release, 

the Commission explained that 

proposed Rules 17Ad–25(g) and (h) help 

promote the integrity of governance 

arrangements of registered clearing 

agencies by helping ensure that a 

registered clearing agency is capable of 

both identifying potential conflicts 

when they arise and subjecting conflicts 

to a transparent and uniform process of 

review, mitigation or elimination, and 

documentation.194 The proposed rules 

would help ensure that potential 

conflicts of interest are identified and 

documented, that policies and 

procedures for their management have 

been established ex ante to help ensure 

a consistent approach over time, and 

that cases are subject to established 

processes for review and mitigation or 

elimination.195 By requiring the 

registered clearing agency to identify 

and document both existing and 

potential conflicts of interest involving 

directors or senior managers of the 

registered clearing agency, proposed 

Rule 17Ad–25(g) was intended to 

address the conflicts of interests of 

directors and senior managers that 

could undermine the decision-making 

process within a registered clearing 

agency or interfere with fair 

representation and equitable treatment 

of clearing members or other market 

participants by a registered clearing 

agency.196 The Commission stated that 

the ability to identify potential conflicts 

of interest is critical to ensuring the 

effective identification and management 

of actual conflicts of interest.197 In the 

Governance Proposing Release, the 

Commission specifically explained that 

a clearing agency must be able to spot 

close cases, where another director, 

manager, employee, or observer might 

perceive a conflict of interest, in order 

to more effectively manage actual 

conflicts and help ensure the integrity of 

decisions made in the governance of the 

clearing agency.198

With regard to proposed Rule 17Ad– 

25(h), the Commission explained in the 

Governance Proposing Release that 

because a registered clearing agency 

may not have access to information 

necessary to identify a potential conflict 

of interest, the proposed rule would also 

require a registered clearing agency to 

have policies and procedures that 

require a director to document and 

inform the registered clearing agency 

promptly of the existence of any 

relationship or interest that reasonably 

could affect the independent judgment 

or decision-making of the director.199

The Commission explained that it is 

requiring policies and procedures that 

focus on any relationship or interest that 

reasonably could affect the independent 

judgment or decision-making of the 

director, rather than material 

relationships or interests, so that the 

registered clearing agency—not the 

party with a reporting obligation—can 

determine whether a relationship or 

interest is subject to mitigation or 

elimination under the conflicts of 

interest policy.200 The Commission 

stated that this approach would help 

ensure that the registered clearing 

agency has sufficient information to 

investigate, identify and address 

potential conflicts.201

Commenters generally supported 

proposed Rules 17Ad–25(g) and (h),202

notably the principles-based approach 

to the rules.203 Two commenters urged 

the Commission to consider 

modifications to the rules.204

1. Mitigation or Elimination of Conflicts 

While generally supportive of the 

proposed rules, one commenter urged 

the Commission to strengthen the rule, 

stating that proposed Rule 17Ad–25(g) 

is vague on exactly how a registered 

clearing agency should ‘‘mitigate or 

eliminate’’ conflicts.205 The commenter 

suggested that the proposed rule should 

instead specify that agency policies 

should require recusal unless or until a 

conflict has been fully eliminated.206

The Commission is not modifying 

Rule 17Ad–25(g) in the ways suggested 

by the commenter. The Commission 

disagrees that ‘‘mitigate or eliminate’’ 

conflicts is vague and therefore, should 

be replaced by an outright requirement 

to recuse. As stated in the Governance 

Proposing Release, the registered 

clearing agency is best positioned to 

identify and address conflicts of interest 

that may arise in its operations and risk 

management and decision-making.207

Specifically, given the array of potential 

conflicts of interest scenarios that a 

registered clearing agency may need to 

address, the registered clearing agency 

is best positioned through reasonable 

policies and procedures to mitigate— 

namely, reduce the harm—or eliminate 

these conflicts of interest so that such 

conflicts do not undermine the integrity 

of decisions made in the governance of 

the clearing agency.208 This rule is 

principles-based to provide flexibility, 

for example, to dictate the disposition or 

resolution of private interests that may 

be unworkable or discourage qualified, 

experienced individuals from 

performing their duties to the registered 

clearing agency. Therefore, the rule 

focuses on the process to identify and 


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209See id. 

210See id. (stating that ‘‘disclosure, while an 

effective tool for the clearing agency to identify and 

recognize a conflict of interest, is insufficient by 

itself to reduce the potential harm a conflict of 

interest may have on the clearing agency.’’). 

211See IDTA at 5 (stating that ‘‘[t]o ensure all 

voices are heard, the policies and procedures 

should mandate that the reviewing and mitigation 

of conflicts are conducted by a diverse group, and, 

most particularly, not only large institutions. . . . 

the IDTA recommends the consideration of the 

impact on institutions that are not FSOC designated 

SIFIs. Small and middle-market participants would 

be able to provide ongoing feedback on how 

policies are impacting the markets in order to 

minimize conflicts of interest and ensure 

competition among institutions of all sizes’’). 

212See supra Part II.B.3 (discussing the approach 

to participation by small and medium-sized 

participants); infra Part II.F (discussing 

requirements for considering stakeholder 

viewpoints, including the views of small and 

medium-sized participants). 

213See DTCC at 3–4, ICE at 5, LSEG at 13. 

214Better Markets at 22. 

215 Id. 

216See, e.g., 17 CFR 240.17Ad–22(d), (e); 17 CFR 

240.17Ad–27; see also Exchange Act Release No. 

96930 (Feb. 15, 2023), 88 FR 13872, 13905 (Mar. 6, 

2023) (explaining that a ‘‘reasonably designed’’ 

requirement enables the clearing agency to tailor 

policies and procedures to accommodate its 

individualized internal operations, systems, 

business models and users as it determines how 

best to achieve compliance with the rule). 

217 15 U.S.C. 78s(b)(3)(A). 

218See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. 

document existing or potential conflicts 

of interest in the clearing agency 

decision-making involving directors or 

senior managers. Mitigation of the harm 

of such conflicts may include raising 

awareness of the circumstances in 

which conflicts can arise for the 

purpose of preventing conflicts of 

interest and providing training on how 

to identify and report such conflicts. In 

the Governance Proposing Release, the 

Commission explained that in some 

cases a conflicts of interest policy may 

simply require that a director or senior 

manager recuse herself from a particular 

decision to mitigate or eliminate the 

conflict of interest; 209 whether recusal 

is necessary depends on the conflict at 

hand. The Commission emphasizes that 

pursuant to the overarching obligation 

of this rule, elimination of conflicts of 

interest is one method of addressing the 

conflict. Depending on the 

circumstances, it may be appropriate to 

mitigate a conflict through other 

methods.210

Additionally, another commenter 

encouraged the Commission to have the 

rules consider the impact on institutions 

that are not designated systemically 

important financial institutions 

(‘‘SIFIs’’) by the Financial Stability 

Oversight Council (‘‘FSOC’’), as small 

and middle-market participants would 

be able to provide ongoing feedback on 

how policies are impacting the markets 

to minimize conflicts of interest and 

ensure competition among institutions 

of all sizes.211

The Commission is not modifying 

Rule 17Ad–25(d) in response to the 

comment. Because the types and sizes of 

participants vary significantly across 

different registered clearing agencies 

depending on the markets they serve, 

registered clearing agencies could 

determine the impact on non-SIFIs by 

requiring the consideration of 

viewpoints of small participants and a 

range of participants pursuant to Rule 

17Ad–25(j). The Commission 

understands the overarching concerns 

that the commenter highlights about the 

need to have a process to include a 

wider array of stakeholder viewpoints in 

the registered clearing agency’s 

decision-making. In this regard, Rules 

17Ad–25(c) and (j) (rather than Rules 

17Ad–25(g) and (h)) are designed to 

address concerns about a process to 

include stakeholder viewpoints in the 

registered clearing agency’s decisionmaking, including the context that the 

commenter describes.212

2. Use of ‘‘Reasonably Designed’’ 

Policies and Procedures Approach 

Some commenters supported the 

principles-based approach of proposed 

Rules 17Ad–25(g) and (h).213 However, 

one commenter found the language of 

proposed Rule 17Ad–25(h) 

‘‘unnecessary and likely . . . too 

generous towards clearing agencies and 

their boards,’’ specifically, the ‘‘double 

layer of reasonableness review’’ that the 

clearing agency must have policies 

‘‘reasonably designed’’ to prompt 

disclosure of relationships that 

‘‘reasonably could affect the 

independent judgment of . . . the 

director.’’ 214 The commenter suggests 

that the rule ‘‘should instead require 

clearing agencies to affirmatively oblige 

directors to disclose any material 

relationships.’’ 215

The Commission agrees with the 

commenter that disclosure of material 

relationships is an important 

consideration, but the overall structure 

of the rule already requires evaluation of 

certain relationships of a director from 

an objective perspective, and that 

additional modifications to the rule are 

therefore not necessary. The 

Commission proposed rules in the 

context of the overlay of ‘‘written 

policies and procedures reasonably 

designed.’’ 216 The ‘‘reasonably 

designed’’ component, consistent with 

other Commission rules for clearing 

agencies, helps ensure that policies and 

procedures are thoughtfully tailored to 

the specific governance and 

organizational structure of each 

individual clearing agency. The 

commenter suggests that the 

construction of the proposed 

requirement for this policies and 

procedures rule is ‘‘generous’’ to the 

registered clearing agencies and the 

boards. Policies and procedures are 

subject to the SRO rule filing process for 

registered clearing agencies. Except for 

certain rule changes that do not need 

approval, set forth in Exchange Act 

section 19(b)(3)(A) 217 and 17 CFR 

240.19b–4(f), an SRO must submit 

proposed rule changes to the 

Commission for review (after a public 

comment period) pursuant to Rule 19b– 

4 under the Exchange Act.218 This 

established process, as required by 

statute and implemented through a 

regulatory framework, is not designed to 

be ‘‘generous’’ to the registered clearing 

agency and its board. An impact of 

having the rule as a policies and 

procedures requirement is to subject 

such policies and procedures to the 

rigorous SRO rule filing process. 

Additionally, the ‘‘reasonableness’’ 

standard embedded in the policies and 

procedures requirement that is meant to 

be applied to the independent judgment 

of the director imposes an objective 

standard on what would otherwise be 

the subjective judgment of the director. 

Such a reasonableness standard helps 

ensure that analysis under the rule 

occurs from an objective, rather than 

subjective perspective. The 

reasonableness standard better ensures 

that the director and the registered 

clearing agency could not simply 

assume that the director’s judgment 

would not be impaired by a relationship 

when it would be favorable for the 

director to avoid a conflict in a 

particular circumstance. Based on the 

requirements of the rule, registered 

clearing agencies generally should 

evaluate whether certain relationships 

might affect the judgment of a director. 

E. Management of Risks From 

Relationships With Service Providers for 

Core Services 

1. Proposed Rule 17Ad–25(i) 

Proposed Rule 17Ad–25(a) would 

define the term ‘‘service provider for 

critical services’’ to mean any person 

that is contractually obligated to the 

registered clearing agency for the 

purpose of supporting clearance and 

settlement functionality or any other 

purposes material to the business of the 

registered clearing agency. Proposed 

Rule 17Ad–25(i)(1) would require each 

registered clearing agency to establish, 

implement, maintain, and enforce 


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219See Governance Proposing Release, supra note 

2, at 51836–37. 

220See id. at 51836. 

221See, e.g., DTCC, Businesses and Subsidiaries, 

https://www.dtcc.com/about/businesses-andsubsidiaries; see also Governance Proposing 

Release, supra note 2, at 51836 n.137 (providing the 

same example and also explaining that three 

registered clearing agencies, DTC, FICC, and NSCC, 

are subsidiaries of DTCC). 

222See, e.g., NSCC, Disclosure Framework for 

Covered Clearing Agencies and Financial Market 

Infrastructures (Dec. 2021), at 84, https://

www.dtcc.com/-/media/Files/Downloads/legal/ 

policy-and-compliance/NSCC_Disclosure_

Framework.pdf (‘‘NSCC utilizes the services of 

investment advisors and executing brokers to 

facilitate such [close-out purchase and sale] 

transactions [for open Continuous Net Settlement 

(CNS) positions] promptly following its 

determination to cease to act. NSCC may engage in 

hedging transactions or otherwise take action to 

minimize market disruption as a result of such 

purchases and sales.’’); see also Governance 

Proposing Release, supra note 2, at 51836 n.138 

(providing the same example). 

223See, e.g., FICC, Disclosure Framework for 

Covered Clearing Agencies and Financial Market 

Infrastructures (Dec. 2021), at 58, 65, https://

www.dtcc.com/-/media/Files/Downloads/legal/ 

policy-and-compliance/FICC_Disclosure_

Framework.pdf (‘‘Collateral securities are re-priced 

every night, from pricing sources utilized by FRM’s 

[Financial Risk Management’s] Securities Valuation 

unit. . . . FICC utilizes multiple third-party 

vendors to price its eligible securities and uses a 

pricing hierarchy to determine a price for each 

security.’’); see also Governance Proposing Release, 

supra note 2, at 51836 n.139 (providing the same 

example). 

224See Governance Proposing Release, supra note 

2, at 51836. 

225See id. 

226See id. at 51837. 

227See id. at 51836. 228See id. 229See Barclays et al. at 3; ISDA at 6; DTCC at 

7. 230See OCC at 10 (stating that the Commission 

approach is ‘‘overbroad, unnecessarily prescriptive, 

and duplicative of long-standing director 

obligations extant in general corporate law and 

reinforced by current Commission regulation and 

OCC rules.’’); DTCC at 3 (stating that ‘‘[w]hile we 

support the Commission’s overall policy objectives 

. . . the proposed requirements and definition are 

overly broad, could conflict with existing 

requirements and standards other regulators have 

applied in respect of CSPs, confuse the distinction 

between the roles of the board and management, 

and will deter otherwise qualified individuals from 

serving as registered clearing agency board 

directors’’). 

231See OCC at 10 (stating that ‘‘though more time 

and clarity regarding the scope and application of 

the Proposed Rule 17Ad–25(i) are required to 

conduct a deeper analysis into the potential 

cumulative costs of compliance with it, we 

preliminarily believe such costs could be 

considerable’’); DTCC at 3 (stating that ‘‘[w]e also 

believe the Proposal significantly underestimates 

the burdens and costs of these requirements’’); 

CCP12 at 7. 

232See Governance Proposing Release, supra note 

2, at 51836, 51846 n.195. 

233See id. at 51837 (explaining that ‘‘the board 

should be aware of the risks flowing into the 

registered clearing agency . . . and maintain 

awareness of those risks over time by monitoring 

management’s oversight of the relationship. In its 

traditional function as a check on management, the 

board can help ensure that, for example, 

management assesses and addresses performance 

issues by the provider under any agreement with 

the provider and helps to ensure that product or 

other deliverables are provided timely and 

consistent with the terms of the agreement.’’). 

written policies and procedures 

reasonably designed to enable the board 

to confirm and document that risks 

related to relationships with service 

providers for critical services are 

managed in a manner consistent with 

the registered clearing agency’s risk 

management framework, and to review 

senior management’s monitoring of 

relationships with service providers for 

critical services. Proposed Rule 17Ad– 

25(i)(2) would require each registered 

clearing agency to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

enable the board to approve policies and 

procedures that govern the relationship 

with service providers for critical 

services. Proposed Rule 17Ad–25(i)(3) 

would require each registered clearing 

agency to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

enable the board to review and approve 

plans for entering into third-party 

relationships where the engagement 

entails being a service provider for 

critical services to the registered 

clearing agency. Proposed Rule 17Ad– 

25(i)(4) would require each registered 

clearing agency to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

enable the board to, through regular 

reporting to the board by senior 

management, confirm that senior 

management takes appropriate actions 

to remedy significant deterioration in 

performance or address changing risks 

or material issues identified through 

ongoing monitoring. 

In the Governance Proposing Release, 

the Commission explained that it 

proposed a companion governance 

requirement to existing rules to make 

explicit the registered clearing agency’s 

board obligation to oversee the range of 

its service providers for critical services, 

particularly as registered clearing 

agencies explore and use new 

technologies to facilitate prompt and 

accurate clearance and settlement in 

new and innovative ways and may 

increasingly determine that service 

providers will offer the most effective 

technology to perform key functions.219

The Commission provided many 

examples of service provider 

relationships meant to be scoped into 

the proposal to capture the range of 

relationships and wide variety of 

functions that service providers perform 

on behalf of the registered clearing 

agency.220 For example, a clearing 

agency may contract with its parent 

company to staff the registered clearing 

agency; 221 a clearing agency may 

contract with one or more investment 

advisers to help facilitate the closing out 

of a defaulting participant’s portfolio; 222

a clearing agency may use one or more 

data service providers to help calculate 

pricing information for securities; 223 a 

clearing agency may also purchase 

technology services from service 

providers that may help to facilitate 

clearance and settlement in a number of 

ways.224 As the Commission stated in 

the Governance Proposing Release, in 

each of the cases described above, 

failure of the service provider to 

perform its obligations would pose 

significant operational risks and have 

critical effects on the ability of the 

registered clearing agency to perform its 

risk management function and facilitate 

prompt and accurate clearance and 

settlement.225 Additionally, absent 

regular monitoring and oversight, these 

relationships could endanger the 

operational resilience of a registered 

clearing agency and call into question 

the registered clearing agency’s ability 

to meet its obligations under the 

Exchange Act.226 In this regard, the 

Commission emphasized that 

outsourcing a clearance and settlement 

functionality to a service provider for 

critical services does not relieve the 

registered clearing agency of its 

statutory and regulatory obligations, 

which remain with the registered 

clearing agency.227 It was against this 

backdrop and as part of the evolution of 

the registered clearing agency regulatory 

framework that the Commission 

proposed these requirements.228

Commenters generally supported the 

proposed rule and the Commission’s 

policy objectives.229 However, some 

commenters objected to the definition of 

‘‘service provider for critical services’’ 

as unclear and overbroad and to 

proposed Rule 17Ad–25(i) as confusing 

the roles of senior management and the 

board.230 Some commenters also 

believed that the Commission 

underestimated the burdens and costs of 

proposed Rule 17Ad–25(i).231

The proposed definition and 

requirements on service provider 

oversight were: (i) meant to capture 

outsourced services 232 directly 

applicable to core clearance and 

settlement functionality; (ii) not meant 

to impose duplicative responsibility to 

manage service provider relationships 

on the board when these are already 

within the remit of senior management 

to manage service provider 

relationships,233 and, so, in this regard, 

(iii) the proposed requirements would 


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234As discussed further below, Rule 17Ad–25(a) 

now uses the term ‘‘service providers for core 

services,’’ not ‘‘critical services.’’ 

235See ISDA at 7. 236See, e.g., DTCC at 21; OCC at 10; ICE at 6; 

CCP12 at 6–7. 237See DTCC at 7 (‘‘[T]he written contract would 

make clear that local police, fire, and other 

municipal services are explicitly out of scope. The 

proposed definition of service provider should also 

include an ‘ongoing basis’ element. Without this 

element, a one-off or single service may be included 

within the scope of the Proposal and trigger 

application of the full risk management lifecycle in 

the same way that a recurring arrangement does.’’). 

238See id. at 8 (stating that ‘‘[w]ith respect to the 

question of clarifying which service providers are 

in fact ‘critical’ for the purposes of ensuring 

effective board oversight, we respectfully ask that 

the Commission first consider more fully how its 

approach to CSPs in the Proposal interacts, and 

potentially creates redundancy or misalignment, 

with existing similar concepts that apply to 

registered clearing agencies, whether under existing 

Commission requirements (such as Regulation 

Systems Compliance and Integrity or ‘Regulation 

SCI’) or under applicable international standards.’’). 

239 Id. at 8. 

240See OCC at 12–13 (stating that ‘‘the proposed 

definition is significantly broader than the 

definition used to define SCI Systems.’ . . . If the 

Commission adopts a rule regarding the oversight 

of relationships with service providers for critical 

services, OCC requests the Commission revise the 

definition of ‘service providers for critical services’ 

to align it with the definition of SCI Systems.’’). 

241 Id. at 27. 

not double or multiply the costs and 

burdens required of the registered 

clearing agencies. Nonetheless, as 

discussed below, to ensure the 

Commission has fully addressed the 

concerns raised by commenters, and to 

specify the intended scope of proposed 

Rule 17Ad–25(i) and the roles of the 

board and senior management in the 

oversight of service providers, the 

Commission is modifying at adoption 

(1) the definition of ‘‘service provider 

for critical services’’ 234 and (2) Rule 

17Ad–25(i). 

Specifically, the Commission is 

modifying the definition to refer to: (a) 

‘‘a written services provider agreement 

for services provided to or on behalf of 

the registered clearing agency, on an 

ongoing basis’’ to replace the proposed 

definition’s reference to ‘‘contractually 

obligated to the registered clearing 

agency’’; and (b) ‘‘directly supports the 

delivery of clearance or settlement 

functionality’’ to replace the proposed 

definition’s reference to ‘‘supporting 

clearance and settlement functionality.’’ 

The Commission also provides guidance 

below that the scope of the definition of 

‘‘service providers for core services’’ 

generally should include cloud services, 

pricing services, model services, 

matching services, any services related 

to straight-through processing, and 

collateral management services. 

Additionally, the Commission is 

modifying Rule 17Ad–25(i) to more 

clearly delineate the roles of senior 

management and the board, in response 

to commenters. First, under Rule 17Ad– 

25(i)(1), the Commission is preserving 

the proposed Rule 17Ad–25(i)(1) 

policies and procedures requirement to 

document service provider risks but is 

modifying the final rule to make clear 

that senior management must evaluate 

and document risks related to the 

service provider agreement, including 

under changes to circumstances and 

potential disruptions, and whether the 

risks can be managed consistent with 

the clearing agency’s risk management 

framework. Second, under Rule 17Ad– 

25(i)(2), the Commission is requiring a 

companion policies and procedures 

requirement found in Rule 17Ad– 

25(i)(1) by requiring in Rule 17Ad– 

25(i)(2) that senior management submit 

to the board for review and approval the 

service provider agreement and senior 

management’s evaluation that is 

required in Rule 17Ad–25(i)(1). Third, 

the Commission is moving the policies 

and procedures requirement originally 

in proposed Rule 17Ad–25(i)(2) to Rule 

17Ad–25(i)(3), now modified to make 

clear that senior management has the 

responsibility to establish policies and 

procedures that govern relationships 

and manage risks related to service 

provider agreements, while also making 

clear that the board is responsible for 

reviewing and approving such policies 

and procedures. 

Fourth, under Rule 17Ad–25(i)(4), the 

Commission is preserving the proposed 

policies and procedures requirement 

originally contained in proposed Rule 

17Ad–25(i)(4) to have ongoing 

monitoring to remedy significant 

deterioration in performance or address 

changing risks or material issues 

identified through ongoing monitoring. 

But the Commission is now modifying 

Rule 17Ad–25(i)(4) to clearly delineate 

the roles of senior management and the 

board. Specifically, Rule 17Ad–25(i)(4) 

is modified to require through policies 

and procedures that senior management 

performs the ongoing monitoring and 

report to the board any action senior 

management takes to remedy significant 

deterioration in performance or address 

changing risks or material issues 

identified. Rule 17Ad–25(i)(4) is also 

modified to have policies and 

procedures to require senior 

management to assess and document 

weaknesses or deficiencies in the 

relationship with the service provider in 

circumstances where the risks or issues 

cannot be remedied, which senior 

management must submit to the board. 

Rule 17Ad–25(i)(4) is also being 

modified to clearly delineate that the 

board is to evaluate any senior 

management action taken to remedy 

significant deterioration in performance 

or address changing risks or materials 

identified. 

The modifications are meant to 

address commenters’ concerns regarding 

the potential that the board is being 

required to undertake responsibilities 

reserved for senior management, as well 

as other elements of the proposed rule. 

In this regard, the modifications 

differentiate more clearly the roles of 

senior management and the board in the 

context of Rule 17Ad–25(i) while 

preserving the intended impact of the 

proposed rule. While the words and 

phrases in the proposed rule have 

changed and moved, the thematic 

elements in the requirements for the 

board and senior management remain 

unchanged. 

2. Definition of Service Provider for 

Core Services 

Although a commenter stated that the 

definition of ‘‘service provider for 

critical services’’ is sufficiently clear 

and scoped,235 other commenters stated 

that it is unclear and overbroad.236 One 

suggested amending the definition to: 

(1) cover any mutual understanding or 

agreement between a registered clearing 

agency and third-party entity by which 

the third-party entity is required or 

commits to provide ongoing goods or 

services to the registered clearing 

agency pursuant to a written 

contract; 237 (2) establish a clear 

definition of what makes a service 

provider ‘‘critical,’’ including providing 

a non-exhaustive list of relationships 

and service providers that registered 

clearing agencies should consider, as 

well as guidance on how to interpret 

materiality in this context; 238 and (3) to 

include only a service provider that 

‘‘directly supports the delivery of 

clearing and settlement functionality or 

any other purpose material to the 

business of the registered clearing 

agency.’’ 239 Another commenter 

objected to the definition, stating that its 

scope is broader than the definition of 

‘‘SCI System’’ under Regulation SCI 240

and also stated that the text ‘‘supporting 

clearance and settlement functionality’’ 

without modification could ‘‘potentially 

capture virtually all non-trivial service 

providers to registered clearing 

agencies, particularly if clearance and 

settlement services is the only or 

primary service offering of the registered 

clearing agency.’’ 241 Another 

commenter stated that this proposed 

requirement would potentially capture a 

large number of non-trivial service 

providers to registered clearing 


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242See CCP12 at 7. 

243See Governance Proposing Release, supra note 

2, at 51836. 

244See DTCC at 8. 

245See OCC at 12, 27; DTCC at 8. 246See Governance Proposing Release, supra note 

2, at 51836 (providing examples of a wide variety 

of functions that service providers perform on 

behalf of the registered clearing agency, including 

its parent company providing staff, investment 

advisers facilitating the closing out of a defaulting 

participant’s portfolio, data service providers 

helping calculate pricing information for securities, 

technology service providers facilitating clearance 

and settlement). 

247See id. 

248See DTCC at 7. 

249Cf. Governance Proposing Release, supra note 

2, at 51836 (stating that ‘‘[u]ltimately, it is the 

responsibility of the board to oversee the 

relationships that management establishes with 

service providers to help ensure that management 

is performing its function more effectively and that 

the clearing agency can facilitate prompt and 

accurate clearance and settlement.’’). 

agencies, particularly in cases where 

clearance and settlement services are 

the only or the primary service offering 

of the registered clearing agency, and 

therefore, suggested that the definition 

be changed to ‘‘any person that is 

contractually obligated to the registered 

clearing agency for the purpose of 

providing critical services that directly 

support clearance and settlement 

functionality.’’ 242

To address the concerns raised above, 

the Commission is modifying the 

definition in Rule 17Ad–25(a) at 

adoption to contain three key elements 

to specify its scope: (i) ‘‘a written 

services provider agreement for services 

provided to or on behalf of the 

registered clearing agency’’ to replace 

the proposed definition’s reference to 

‘‘contractually obligated to the 

registered clearing agency’’; (ii) ‘‘on an 

ongoing basis’’ nature of the services 

provided; and (iii) ‘‘directly supports 

the delivery of clearance or settlement 

functionality’’ to replace the proposed 

definition’s reference to ‘‘supporting 

clearance and settlement functionality.’’ 

The changes to the definition better 

ensure that the final definition of 

‘‘service providers for core services’’ is 

clear and properly scoped. The 

Commission discusses each of these 

modifications in turn below. 

First, the Commission is modifying 

the defined term at adoption to refer to 

‘‘core services,’’ rather than ‘‘critical 

services’’ as proposed.243 To provide 

further clarity and to address comments 

requesting a non-exhaustive list of 

service provider relationships under 

Rule 17Ad–25(i),244 the Commission 

provides guidance that ‘‘core services’’ 

generally should include cloud services, 

pricing services, model services, 

matching services, any services related 

to straight-through processing, and 

collateral management services. This list 

is not meant to be an exhaustive list of 

‘‘core services’’ but is being provided to 

give examples of the services that 

generally should be in scope of the 

definition while allowing clearing 

agencies some discretion to apply the 

definition to their specific markets and 

participants served and products 

cleared. The services in this list reflect 

services that registered clearing agencies 

are seeking from service providers, 

based on the Commission’s supervisory 

experience. For example, a registered 

clearing agency may consider the use of 

cloud services to modernize and further 

develop the systems that underpin its 

core clearance and settlement 

functionality, facilitating, among other 

things, the calculation of its margin 

requirements, the modeling of financial 

risk, and communication with clearing 

agency participants. Similarly, pricing 

and model services directly support 

core clearance and settlement 

functionality when they are used by a 

registered clearing agency to calculate 

end-of-day settlement obligations and 

margin requirements for clearing agency 

participants. In addition, clearing 

agency technologies that facilitate 

matching services, straight-through 

processing, and collateral management 

are themselves the functions of a 

clearing agency and facilitate core 

clearance and settlement of securities 

transactions, and so such technologies 

generally should be within the scope of 

the modified ‘‘core services’’ definition. 

Second, the Commission is modifying 

the definition of ‘‘service provider for 

core services’’ in adopting Rule 17Ad– 

25(a) to mean ‘‘any person that, through 

a written services provider agreement 

for services provided to or on behalf of 

the registered clearing agency, on an 

ongoing basis, directly supports the 

delivery of clearance or settlement 

functionality or any other purposes 

material to the business of the registered 

clearing agency.’’ Rule 17Ad–25(a) now 

uses the term ‘‘service providers for core 

services,’’ not ‘‘critical services,’’ as the 

Commission observes that some 

commenters requested that the 

Commission scope the definition of 

service providers to overlap with the 

definition of ‘‘SCI system’’ in Regulation 

SCI.245 The Commission recognizes that 

the use of the word ‘‘critical’’ could 

evoke Regulation SCI considerations for 

some commenters. However, as 

explained in the Governance Proposing 

Release, the definition in proposed Rule 

17Ad–25(a) is not the same as used in 

Regulation SCI—in scope or subject 

matter.246 The Commission is not 

conforming the scope of the defined 

term to Regulation SCI because the 

definition of ‘‘service provider for 

critical services’’ in proposed Rule 

17Ad–25(a) is, as suggested by a 

commenter, purposefully wider in scope 

than the definition of ‘‘SCI system’’ in 

Regulation SCI because the definition of 

‘‘service provider for critical services’’ 

addresses relationships beyond those 

concerning only technology or systems, 

as explained in the Governance 

Proposing Release.247

The definition is modified to include 

the components of ‘‘a written services 

agreement for services provided to or on 

behalf of the registered clearing agency, 

on an ongoing basis’’ because in the 

Commission’s view, core services 

supporting clearance or settlement 

functionality should be clearly 

memorialized in a written agreement 

that specifies the key elements of any 

core services being provided. 

Specifically, cloud services, pricing 

services, model services, matching 

services, any services related to straightthrough processing, and collateral 

management services are examples of 

ongoing services often provided to a 

registered clearing agency that would be 

subject to a written services agreement 

and therefore within scope of the final 

rule. Such written services agreements 

may not necessarily be entered into by 

the registered clearing agency with a 

service provider for core services; 

rather, and consistent with the final 

rule, such written services agreement 

could be entered into by the parent or 

an affiliate of the registered clearing 

agency for services provided to or on 

behalf of the registered clearing agency. 

In modifying this element of the 

definition, the Commission recognizes 

that the written agreement provides the 

foundation upon which a registered 

clearing agency can assess, manage, and 

monitor the performance of a service 

provider, as well as assess, manage, and 

monitor the risks of the core service— 

and outsourced clearance or settlement 

functionality. In this regard, the 

Commission agrees with the commenter 

that the written agreement provides the 

registered clearing agency with the legal 

authority to direct the service provider 

to comply with the obligations in the 

agreement,248 which is important as the 

registered clearing agency still bears the 

responsibility for compliance with any 

statutory or regulatory obligation when 

it chooses to rely on such a service 

provider.249

Additionally, the modifications to the 

definition are intended to make clearer 

that municipal service providers (which 

are not generally subject to written 


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250See DTCC at 7 (suggesting a modification to 

the definition to include a ‘‘written contract [which] 

would make clear that local police, fire, and other 

municipal services are explicitly out of scope. The 

proposed definition of service provider should also 

include an ‘ongoing basis’ element. Without this 

element, a one-off or single service may be included 

within the scope of the Proposal and trigger 

application of the full risk management lifecycle in 

the same way that a recurring arrangement does.’’). 

251See Governance Proposing Release, supra note 

2, at 51835, n.133 (explaining that the proposed 

rule would not apply to utility companies, such as 

a power company providing general power services 

for the registered clearing agency, although general 

power services are necessary to allow a registered 

clearing agency to function and operate, as a general 

matter). 

252See, e.g., CCP12 at 7; LSEG at 14 (‘‘We agree 

that it is a specific responsibility of the board to 

have oversight.’’). 

253See, e.g., CCP12 at 7 (stating that the 

‘‘enhanced board oversight would duplicate the 

work that is currently performed by staff and 

management at considerable additional cost, 

compromising the careful check and balance 

relationship of the board and management.’’); OCC 

at 10–11 (stating that the proposed rule’s oversight 

dynamic ‘‘would impose responsibilities on the 

Board akin to those that are squarely within the 

purview of management by effectively requiring the 

Board to manage the relationship with service 

providers for critical services’’); ICE at 6 (stating 

that the proposal ‘‘would require the board to go 

beyond its oversight responsibilities and tasks the 

board with a role in managing such relationships.’’). 

254See, e.g., DTCC at 8–10, 14 (stating that ‘‘[w]e 

believe that such a shift in responsibility is 

inappropriate insofar as what the Proposal 

effectively requires is not board oversight of CSP 

relationships but instead direct board management 

of such relationships.’’); OCC at 10–11; CCP12 at 7. 

255See OCC at 13. 

256See LSEG at 14 (‘‘[T]here should be flexibility 

to allow the board to determine the process and 

materiality of service providers of critical services. 

For example, allowing the board to specifically 

delegate to a qualified sub-committee of the board, 

with appropriate escalation and reporting to the 

board.’’). 

257See DTCC at 8–10, 14 (stating that ‘‘[a]s an 

alternative approach, we recommend that the 

Commission not impose the obligations set forth in 

sub-parts (1) and (3) of proposed Rule 17 Ad–25(i) 

directly on the board. . . . [and] follow the 

approach it and other global regulators have applied 

in similar contexts and with the positive outcome 

of helping ensure resiliency and management of 

CSP risk,’’ citing to Rule 1003(b)(l) of Regulation 

SCI and Annex F of the PFMI as precedent). 

258 ICE at 6. 

259See Governance Proposing Release, supra note 

2, at 51837. 

260CCP12 at 8. 

service agreements for ongoing services 

to the registered clearing agency) are not 

captured in the definition, as 

commenters have suggested.250 The 

Commission previously addressed this 

scoping concern in the Governance 

Proposing Release,251 and such services 

neither support the core clearance or 

settlement functionality of the registered 

clearing agency nor are material to the 

clearing agency’s business, in that the 

power company does not perform the 

core clearance or settlement 

functionality or material clearing agency 

business functions itself. 

In addition, the Commission is 

modifying the definition to capture 

service providers that provide services 

on an ongoing basis that directly 

support the delivery of clearance or 

settlement functionality or any other 

purposes material to the business of the 

registered clearing agency. The 

modifications change the scope of the 

proposed definition to capture ongoing 

services and not limit capture of 

services to a single instance. The 

defined term also captures those 

services that directly support the core 

functionality of a clearing agency. In 

this regard, service providers retained 

for administrative tasks or a limited, 

one-time provision of services would 

not be covered by this definition. These 

changes respond to commenters’ 

concerns and also reflect current 

practices in which registered clearing 

agencies have cloud services, pricing 

services, model services, matching 

services, services related to straightthrough processing, and collateral 

management services provided by 

service providers to directly support the 

registered clearing agency’s clearance or 

settlement functionality on an ongoing 

basis. Finally, the Commission is 

modifying the definition to refer to 

‘‘clearance or settlement’’ functionality 

(emphasis added), rather than 

‘‘clearance and settlement 

functionality’’ as proposed, to ensure 

that the definition is consistent with the 

generalized way in which the 

Commission often refers to ‘‘clearance 

and settlement.’’ That is, the definition 

was intended to address both functions 

in an ‘‘either/or’’ sense, as not all 

registered clearing agencies provide 

both functions and the Commission 

often speaks to the collective set of 

functions without specifying whether 

one is ‘‘clearance’’ or ‘‘settlement.’’ 

3. Roles of Senior Management and the 

Board 

While at least two commenters 

acknowledged the corporate governance 

principle that the board conducts 

oversight of management,252 several 

commenters objected to the approach in 

proposed Rule 17Ad–25(i), stating that 

the rule confused the distinction 

between the roles of the board and 

management, thereby contravening this 

corporate governance principle and 

potentially deterring otherwise qualified 

individuals from serving as directors.253

Specifically, some commenters 

understood the proposed rule to shift 

the responsibility for oversight of 

service providers from management to 

the board.254 One commenter urged a 

more principles-based approach and 

also sought clarity as to the scope of 

proposed Rule 17Ad–25(i)(4), which in 

the commenter’s view did not appear to 

be limited to ‘‘service providers for 

critical services’’ and so could apply to 

‘‘significant deterioration in 

performance,’’ ‘‘changing risks,’’ or 

‘‘material issues’’ regarding the business 

of the registered clearing agency. This 

commenter recommended adding a 

materiality threshold to proposed Rule 

17Ad–25(i)(4) to focus the board on 

ensuring that management has 

appropriate processes in place to 

identify and elevate material changing 

risks.255 One commenter recommended 

flexibility in allowing the board to 

determine ‘‘the process and materiality’’ 

of service providers of critical 

services.256 Another commenter urged 

the Commission to take an alternative 

approach to differentiate the board and 

management roles in oversight of 

service provider relationships.257

Additionally, some commenters 

expressed concern regarding the 

proposed requirement for the board to 

‘‘confirm’’ risks posed by a service 

provider. According to one commenter, 

because proposed Rule 17Ad–25(i)(4) 

includes a requirement for the board to 

‘‘confirm that senior management takes 

appropriate actions to remedy 

significant deterioration in performance 

or address changing risks or material 

issues,’’ which is ‘‘not consistent with a 

board’s oversight role[, ] [i]t is unclear 

how, in practice, a board could satisfy 

this ‘confirmation’ function without 

engaging in a management function, 

which would conflict with and distract 

from the board’s oversight 

functions.’’ 258 With regard to statements 

in the Governance Proposing Release 

that registered clearing agencies could 

confirm and document the risks posed 

by a service provider for critical services 

by completing a self-assessment based 

on the format and substance of Annex 

F to the PFMI,259 two commenters 

expressed concern. One stated that ‘‘the 

board itself should not conduct such an 

assessment, as such tasks should be 

performed by an internal corporate 

function such as third-party risk 

management, internal audit, or a similar 

function and then reported to the board 

(or board-level committee).’’ 260 Another 

commenter stated that although it ‘‘does 

not believe that the Commission should 

require that the board confirm and 

document through a self-assessment that 

risks related to relationships with 

service providers for critical services are 

managed in a manner consistent with its 

risk management framework. . . . [it] 

does believe that the Commission 


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261OCC at 27. 

262For this reason, the Commission also believes 

that the proposed costs and burdens for Rule 17Ad– 

25(i) were generally accurate, as further discussed 

in Part V.F. 

263See, e.g., Governance Proposing Release, supra 

note 2, at 51837 (stating that ‘‘[i]n its traditional 

function as a check on management, the board can 

help ensure that, for example, management assesses 

and addresses performance issues by the provider 

under any agreement with the provider and helps 

to ensure that product or other deliverables are 

provided timely and consistent with the terms of 

the agreement.’’). 

264See, e.g., Governance Proposing Release, supra 

note 2, at 51836 (recognizing that ‘‘the board . . . 

oversee[s] the relationships that management 

establishes with service providers to help ensure 

that management is performing its function more 

effectively and that the clearing agency can 

facilitate prompt and accurate clearance and 

settlement.’’). 

265See DTCC at 8–10, 14; CCP12 at 7; LSEG at 

14; OCC at 10–11; ICE at 6. 

266 In the Governance Proposing Release, the 

Commission had suggested that one method of 

confirming and documenting the risks posed by a 

service provider for critical services to the 

registered clearing agency would be for the board 

to complete a self-assessment based on the format 

and substance of Annex F in the PFMI, which 

highlights oversight expectations applicable to 

critical service providers. Given that commenters 

expressed concerns about duplicating management 

functions at the board level, the Commission is not 

adopting this guidance. See DTCC at 3; CCP12 at 

7. 

267See Governance Proposing Release, supra note 

2, at 51837. 

268See ICE at 6. 

269CCP12 at 8; OCC at 27; DTCC at 8–10, 14 

(stating that ‘‘[a]s an alternative approach, we 

recommend that the Commission not impose the 

obligations set forth in sub-parts (1) and (3) of 

proposed Rule 17 Ad–25(i) directly on the board’’). 

270See, e.g., DTCC at 8–10, 14; CCP12 at 7; LSEG 

at 14; OCC at 10–11; ICE at 6. 

271See Governance Proposing Release, supra note 

2, at 51837. 

should state explicitly that a properly 

executed self-assessment similar to the 

Annex F described in the Proposed Rule 

is evidence of compliance with 

Proposed Rule 17Ad–25(i).’’ 261

It was not the Commission’s intent to 

merge, adjust, or duplicate management 

functions with those of the board in 

contravention of traditional corporate 

governance principles with the board 

directly managing the service provider 

relationships, as commenters have 

suggested.262 In the Governance 

Proposing Release, the Commission 

acknowledged the differentiated roles 

and traditional functions 263 of senior 

management and the board.264 To 

improve clarity in response to 

commenters concerns,265 the 

Commission is modifying the rule at 

adoption to specify and differentiate the 

roles and responsibilities of the board 

and senior management of the registered 

clearing agency in the oversight of 

service providers. These changes in the 

final rule better ensure that risks posed 

by service providers for core services are 

properly monitored and managed and 

better delineate the board oversight 

function in line with corporate 

governance principles. Because the 

modifications are meant to more clearly 

differentiate the roles of senior 

management and the board in the 

context of Rule 17Ad–25(i) while 

preserving the intended impact of the 

proposed rule, the words and phrases in 

the proposed rule have changed and 

moved in Rule 17Ad–25(i), but the 

requirements for the board and senior 

management remain unchanged. Each 

requirement of Rule 17Ad–25(i) is 

further explained below. 

First, under Rule 17Ad–25(i)(1) as 

adopted, a registered clearing agency 

must establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

require senior management to evaluate 

and document the risks related to an 

agreement with a service provider for 

core services, including under changes 

to circumstances and potential 

disruptions, and whether the risks can 

be managed in a manner consistent with 

the clearing agency’s risk management 

framework.266 In the Governance 

Proposing Release, the Commission 

discussed the role of senior management 

to monitor each relationship with a 

service provider for critical services, 

confirming and documenting that the 

risks related to such relationships have 

been considered and addressed 

consistent with the clearing agency’s 

risk management framework.267 The 

Commission agrees with the 

commenter’s concern with regard to the 

term ‘‘confirm.’’ 268 Under Rule 17Ad– 

25(i)(1), while preserving proposed Rule 

17Ad–25(i)(1)’s policies and procedures 

requirement to document service 

provider risks, the Commission is 

modifying the final rule to specify that 

senior management must evaluate— 

rather than requiring that the board 

must ‘‘confirm’’—and document risks 

related to the service provider 

agreement, including under changes to 

circumstances and potential 

disruptions, and whether the risks can 

be managed in a manner consistent with 

the clearing agency’s risk management 

framework. If changes to circumstances 

(e.g., a need to expand or scale up the 

scope or breadth of services of the 

service provider beyond what was 

initially agreed to or envisioned) and 

potential disruptions (e.g., disruptions 

caused by natural disasters or systems 

outages) occur, senior management must 

evaluate and document risks related to 

such changes and disruptions. The 

added language of ‘‘changes to 

circumstances and potential 

disruptions’’ is meant to reflect the 

parallel elements in Rule 17Ad–25(i)(4) 

regarding ‘‘changing risks or material 

issues identified.’’ These modifications 

to Rule 17Ad–25(i)(1) require the 

policies and procedures to clearly 

delineate the role senior management 

must undertake to evaluate risks posed 

by service providers for core services to 

the registered clearing agency, as 

requested by commenters. For the same 

reason to address commenters’ 

concerns 269 regarding a board selfassessment under Annex F of the PFMI, 

the Commission is not requiring the 

board to conduct a self-assessment of 

such risks. 

Second, under Rule 17Ad–25(i)(2) as 

adopted, a registered clearing agency 

must establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

require senior management to submit to 

the board for review and approval any 

agreement that would establish a 

relationship with a service provider for 

core services, along with the risk 

evaluation required in Rule 17Ad– 

25(i)(1). As a companion policies and 

procedures requirement to Rule 17Ad– 

25(i)(1), Rule 17Ad–25(i)(2) captures the 

intent of proposed Rule 17Ad–25(i)(3)’s 

requirement for policies and procedures 

to require the board to ‘‘review and 

approve plans for entering into thirdparty relationships where the 

engagement entails being a service 

provider for critical services.’’ 

Rule 17Ad–25(i)(1) requires policies 

and procedures to have senior 

management evaluate service provider 

relationship risks posed to the registered 

clearing agency, while Rule 17Ad– 

25(i)(2) requires policies and procedures 

to have senior management submit to 

the board its risk evaluation and any 

agreements for board review and 

approval. In response to commenters’ 

concerns,270 the modifications are 

designed to clearly differentiate the 

responsibilities the board and senior 

management have in this regard in line 

with corporate governance principles, 

which was the Commission’s intent at 

proposal. In the Governance Proposing 

Release, the Commission explained that 

Proposed Rule 17Ad–25(i)(1) would also 

require review of senior management’s 

oversight of a service provider 

relationship.271 The Commission stated 

its belief that the board should be aware 

of the risks flowing into the registered 

clearing agency, including through its 

relationships with service providers for 

critical services, and maintain 

awareness of those risks over time by 

monitoring management’s oversight of 


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272See id. 273See id. 274See id. 275See id. 276See, e.g., DTCC at 8–10, 14; CCP12 at 7; LSEG 

at 14; OCC at 10–11; ICE at 6. 277See CCA Standards Adopting Release, supra 

note 4, at 70805. 

278See, e.g., DTCC at 8–10, 14; CCP12 at 7; LSEG 

at 14; OCC at 10–11; ICE at 6. 

279See CCA Standards Adopting Release, supra 

note 4, at 70805. 

280See Governance Proposing Release, supra note 

2, at 51837. 

281See id. 

282See id. 

the relationship. In the Governance 

Proposing Release, the Commission 

explained that, under Proposed Rule 

17Ad–25(i)(3), the board would review 

and approve plans for entering into 

third-party relationships where the 

engagement entails being a service 

provider for critical services to the 

registered clearing agency.272 The 

Commission stated its belief such board 

participation is necessary to ensure the 

maintenance of sound risk management 

principles as the clearing agency enters 

into contractual relationships with third 

parties.273 Board involvement helps 

ensure that management has sufficiently 

established terms of performance by the 

service provider that can support the 

needs of the registered clearing agency 

and that management also has 

evaluated, assessed, and accounted for 

any increased level of risk to the 

registered clearing agency.274 As stated 

in the Governance Proposing Release, 

the board generally should monitor such 

matters as part of its oversight 

responsibilities.275 In this regard, Rule 

17Ad–25(i)(2), modified as adopted, is 

substantively consistent with the 

discussion of this element of the 

proposed rule in the Governance 

Proposing Release. 

Third, under Rule 17Ad–25(i)(3) as 

adopted, a registered clearing agency 

must establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

require senior management to be 

responsible for establishing the policies 

and procedures that govern 

relationships and manage risks related 

to such agreements with service 

providers for core services and require 

the board to be responsible for 

reviewing and approving such policies 

and procedures. In modifying Rule 

17Ad–25(i)(3), the Commission is 

moving the policies and procedures 

responsibility originally in proposed 

Rule 17Ad–25(i)(2) to Rule 17Ad– 

25(i)(3). These modifications are being 

made to address commenters’ concerns 

about the rule not being clear about 

differentiated senior management and 

board responsibilities under corporate 

governance principles.276 As a general 

matter, proposed changes to a registered 

clearing agency’s policies and 

procedures must be approved by board 

action or under authority delegated by 

the board.277 As adopted, Rule 17Ad– 

25(i)(3) is written to explicitly require 

that senior management—as the group 

responsible for evaluating the risks of 

service provider relationships pursuant 

to Rule 17Ad–25(i)(1)—establish 

policies and procedures to manage the 

risks posed by and relationships with 

the service providers for core services, 

and that such policies and procedures 

are reviewed and approved by the 

board. In this regard, Rule 17Ad– 

25(i)(3), as adopted, is substantively 

consistent with established practices of 

registered clearing agencies with regard 

to board review and approval of 

registered clearing agency policies and 

procedures. 

Fourth, under Rule 17Ad–25(i)(4) as 

adopted, a registered clearing agency 

must establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

require senior management to perform 

ongoing monitoring of the relationship, 

and report to the board for its evaluation 

of any action taken by senior 

management to remedy significant 

deterioration in performance or address 

changing risks or material issues 

identified through such monitoring; or if 

the risks or issues cannot be remedied, 

require senior management to assess 

and document weaknesses or 

deficiencies in the relationship with the 

service provider for submission to the 

board. Under Rule 17Ad–25(i)(4) at 

adoption, the Commission is preserving 

proposed Rule 17Ad–25(i)(4)’s policies 

and procedures requirement to have 

ongoing monitoring to remedy 

significant deterioration in performance 

or address changing risks or material 

issues identified through ongoing 

monitoring. But the Commission is now 

modifying Rule 17Ad–25(i)(4) to clearly 

delineate the roles of senior 

management and the board in this 

context, as a response to commenters’ 

corporate governance concerns.278

Specifically, Rule 17Ad–25(i)(4) is 

modified to require policies and 

procedures that senior management 

perform the ongoing monitoring and 

report to the board any action senior 

management takes to remedy significant 

deterioration in performance or address 

changing risks or material issues 

identified. Rule 17Ad–25(i)(4) is also 

modified to require policies and 

procedures that has senior management 

assess and document weaknesses or 

deficiencies in the relationship with the 

service provider in circumstances where 

the risks or issues cannot be remedied, 

which senior management must submit 

to the board. Elements of ‘‘remedy 

significant deterioration in performance 

or address changing risks or material 

issues’’ were contained in Proposed 

Rule 17Ad–25(i)(4). The modifications 

in the adopted rule are meant to frame 

the responsibilities more clearly to 

senior management, as requested by 

commenters. Rule 17Ad–25(i)(4) is also 

being modified to clearly delineate that 

the board is to evaluate any senior 

management action taken to remedy 

significant deterioration in performance 

or address changing risks or materials 

identified. 

In its traditional function as a check 

on management based on corporate 

governance principles, the board can 

better ensure that products or other 

deliverables are provided timely and 

consistent with the terms of a service 

provider agreement, if the board 

evaluates senior management action to 

address service provider performance 

issues.279 In the Governance Proposing 

Release, the Commission explained that 

under Proposed Rule 17Ad–25(i)(4), the 

board would have responsibility for 

overseeing the extent to which senior 

management remedies performance 

issues under a service provider 

contract.280 The changes to Rule 17Ad– 

25(i)(4) make clear that while senior 

management is responsible for ongoing 

monitoring of the service provider 

relationship and its attendant risks, it is 

the board that is responsible for 

overseeing senior management’s 

response to those risks. This layered 

oversight responsibility in the context of 

service providers is important because a 

key source of risk in any service 

provider relationship to a registered 

clearing agency is the operational risks 

that may arise if a service provider is 

not performing pursuant to the agreed 

terms of the contractual relationship.281

Without the board’s effective ongoing 

monitoring of such risks and oversight 

of management’s remedial actions to 

control such risks, the registered 

clearing agency may be faced with 

increasing levels of risk that undermine 

sound risk management and operational 

resilience.282 Accordingly, the 

Commission continues to believe that 

policies and procedures should 

specifically provide for reporting to the 

board by senior management regarding 

the service provider relationship and 

associated risks, as well as the board 

oversight and evaluation of senior 

management’s ongoing monitoring of 


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283See id. 

284See OCC at 13; LSEG at 14. 

285See LSEG at 14 (‘‘[T]here should be flexibility 

to allow the board to determine the process and 

materiality of service providers of critical services. 

For example, allowing the board to specifically 

delegate to a qualified sub-committee of the board, 

with appropriate escalation and reporting to the 

board.’’). 

286See Governance Proposing Release, supra note 

2, at 51838 (‘‘The Commission believes that other 

relevant stakeholders generally would include 

investors, customers of participants, as well as 

securities issuers.’’). 

287See id. (‘‘[T]he Commission believes that 

requiring registered clearing agencies to document 

their consideration of such viewpoints would help 

ensure that a record exists of the viewpoints 

provided by participants and other relevant 

stakeholders regarding material developments in a 

clearing agency’s governance and operations, 

ensuring that the clearing agency indicated that it 

had received such viewpoints and evaluated their 

merits.’’). 

288See ISDA at 5; SIFMA at 3; Citadel at 1; 

Barclays et al. at 2. 

289See OCC at 14; DTCC at 12–13; CCP12 at 9. 

290See OCC at 15, CCP12 at 9; DTCC at 13–14. 

291See CCP12 at 8,10; ISDA at 5; SIFMA AMG at 

5–7; Barclays et al. at 2; ICI at 5; Better Markets 

at21. 

292See ICI at 4; SIFMA AMG at 5; SIFMA at 3– 

4. 

293See OCC at 14; DTCC at 12–13; CCP12 at 9; 

ICE at 6. 

294See OCC at 14–15 (explaining various 

initiatives as part of a ‘‘multi-pronged’’ governance 

framework that furthers ‘‘the goal of considering the 

viewpoints of relevant stakeholders in corporate 

initiatives,’’ including elements of its bylaws and 

committee structure, use of public directors on its 

board, and the FRAC). 295See DTCC at 12 (explaining its view that 

‘‘DTCC’s participant-owned governance structure 

results in a board and board committee composition 

that is strongly aligned and widely diverse in 

representing the various participant types that 

benefit from the services of the registered clearing 

agencies’’ and that the DTCC clearing agencies 

‘‘maintain a diverse array of participant and 

stakeholder working groups that are designed to 

solicit input from constituencies beyond those 

immediately represented on the boards of the 

registered clearing agencies’’ including its 

‘‘Systemic Risk Roundtable, Risk Advisory Council, 

Clearing Agency Liquidity Council, Client Risk 

Forum, and FMI Forum’’). 

296See 17 CFR 240.17Ad–252(e)(2)(iii) (requiring 

a covered clearing agency to establish, implement, 

maintain and enforce written policies and 

procedures reasonably designed to support the 

public interest requirements in Exchange Act 

section 17A, and the objectives of owners and 

participants); 17 CFR 240.17Ad–252(e)(2)(vi) 

(requiring a covered clearing agency to establish, 

implement, maintain and enforce written policies 

and procedures reasonably designed to consider the 

interests of participants’ customers, securities 

issuers and holders, and other relevant stakeholders 

of the covered clearing agency). 

297See DTCC at 13 (stating that further 

prescribing and standardizing the current approach 

in existing Rules 17Ad–252(e)(2)(iii) and (vi) is 

redundant, overly prescriptive, and will likely 

reduce the ability of each unique covered clearing 

agency to develop the necessary stakeholder inputs 

unique to the cleared markets that they serve). 

and response to the service provider 

relationship and risks.283

The Commission is not modifying 

Rule 17Ad–25(i)(4) to be more flexible 

and principles-based, as two 

commenters requested.284 Rule 17Ad– 

25(i)(4) provides the general parameters 

for registered clearing agencies to 

establish policies and procedures to 

meet the requirements of the rule 

without prescribing the manner and 

content of the ongoing monitoring of the 

service provider relationship and the 

manner and content of the board’s 

evaluation of senior management action 

taken to remedy significant 

deterioration in performance or address 

changing risks or material issues 

identified through such monitoring. In 

response to one commenter’s request to 

have the flexibility for the board to 

delegate its responsibilities under Rule 

17Ad–25(i) to a qualified board subcommittee,285 the board may choose to 

do so under Rule 17Ad–25(e), which 

provides that if any committee has the 

authority to act on behalf of the board, 

the composition of that committee must 

have at least the same percentage of 

independent directors as is required for 

the board of directors. 

F. Obligation To Formally Consider 

Stakeholder Viewpoints 

1. Proposed Rule 17Ad–25(j) 

Proposed Rule 17Ad–25(j) would 

require each registered clearing agency 

to establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to solicit, consider, 

and document its consideration of the 

views of participants and other relevant 

stakeholders of the registered clearing 

agency regarding material developments 

in its governance and operations on a 

recurring basis. 

In the Governance Proposing Release, 

the Commission explained that such 

‘‘other relevant stakeholders’’ generally 

would include investors, customers of 

clearing agency participants, and 

securities issuers.286 The Commission 

also explained that requiring registered 

clearing agencies to document their 

consideration of such viewpoints would 

help ensure that a record exists of the 

viewpoints provided by participants 

and other relevant stakeholders 

regarding material developments in a 

registered clearing agency’s governance 

and operations by requiring the 

registered clearing agency to document 

that it had received such viewpoints 

and evaluated their merits.287

Many commenters supported the 

proposed approach to addressing 

stakeholder viewpoints.288 Some 

commenters sought clarity regarding 

whether existing registered clearing 

agency rules are sufficient to comply 

with the proposed rule or whether they 

need to introduce or modify any 

existing processes.289 Furthermore, 

some commenters recommended 

limiting the scope of the rule to material 

developments which affect clearing 

agencies’ risk management or risk 

profile.290 Other commenters sought 

clarity on the frequency of outreach 

with relevant stakeholders, as well as 

the design and approach to fora 

formation.291 Finally, some commenters 

recommended that the Commission 

harmonize proposed Rule 17Ad–255(j) 

with CFTC regulations at 17 CFR 

39.24(b)(12) requiring the establishment 

of an RWG to obtain input from 

stakeholders.292 The Commission 

addresses each of these topics in Parts 

II.F.2 through II.F.7. 

2. Concern Regarding Duplicative 

Requirements 

Several commenters suggested that 

existing rules at the registered clearing 

agencies already consider views of 

clearing agency participants and other 

stakeholders, stating that Rule 17Ad– 

255(j) may be duplicative, redundant, or 

unnecessary.293 As discussed further 

below, the Commission is adopting Rule 

17Ad–255(j) to supplement existing 

Commission requirements and to help 

formalize processes and structures at the 

registered clearing agencies. 

First, one registered clearing agency 

commenter explained that its existing 

governance framework, which includes 

the composition of its board and 

reliance on an advisory group it titles 

the ‘‘Financial Risk Advisory Council’’ 

(FRAC), affords relevant stakeholders 

the opportunity to provide their 

viewpoints on relevant risk management 

issues.294 Another registered clearing 

agency commenter similarly stated that 

its existing governance framework 

captures clearing participant and other 

stakeholder views through its board 

composition as well as through its 

diverse array of clearing agency 

participant and stakeholder working 

groups.295 Given its current structure, 

the commenter sought clarity on 

whether a covered clearing agency, 

subject to requirements in 17 CFR 

240.17Ad–252(e)(2)(iii) and (vi) (‘‘Rule 

17Ad–252(e)(2)’’),296 is likely already 

observing the requirements set forth in 

proposed Rule 17Ad–255(j), or whether 

there is something more a covered 

clearing agency should do to satisfy the 

proposed requirements. If the latter, the 

commenter stated its belief that such an 

approach would be redundant, overly 

prescriptive, and likely reduce the 

ability of each unique covered clearing 

agency to develop the necessary 

stakeholder inputs.297 If the former, the 


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298See id. 

299See id. 

300See Governance Proposing Release, supra note 

2, at 51838. 

301See id. 

302See OCC at 15; CCP12 at 9; ICE at 6–7. See 

generally 15 U.S.C. 78s; 17 CFR 240.19b–4 (setting 

forth requirements for the filing with the 

Commission of proposed changes to SRO rules). 

303See ICE at 6–7; OCC at 15. See generally 12 

U.S.C. 5465(e)(1)(A); 17 CFR 240.19b–4(n) (setting 

forth the requirement for a SIFMU to file advance 

notice of material changes with its designated 

supervisory authority under the Dodd-Frank Act). 

304See CCP12 at 9 (also explaining that clearing 

agencies disclose extensive information in their 

public quantitative and qualitative disclosures 

under the PFMIs and operate under publicly 

available rulebooks). 

305See ICE at 7. 

306See ICE at 6; CCP12 at 9; OCC at 15. 

307See Governance Proposing Release, supra note 

2, at 51813 (‘‘[C]lear and transparent governance 

arrangements help optimize the clearing agency’s 

decisions, rules and procedures that the 

Commission considers in the SRO rule filing 

process because clearing agency transparency 

improves the quality of the information shared with 

stakeholders, which in turn improves the public 

comments submitted in response to rule filings.’’). 

308See OCC at 15; CCP12 at 9; DTCC at 13–14. 

309See OCC at 15. 

commenter recommended that the 

Commission clarify this point further.298

The commenter also inquired whether 

the proposed rule was intended for 

covered clearing agencies to document 

how they currently comply with Rules 

17Ad–252(e)(2)(iii) and (vi), 

recommending that the Commission 

modify the proposed rule to more 

specifically consider how it would 

apply to covered clearing agencies 

versus other registered clearing 

agencies.299

With respect to the first two 

comments stating that the registered 

clearing agencies’ existing governance 

framework already captures clearing 

participant and other stakeholder views, 

the Governance Proposing Release 

explained that many clearing agencies 

already have established committees, 

working groups, and other fora of 

varying size, scope, and formality to 

share and solicit information with 

participants, the customers of their 

clearing agency participants, and other 

stakeholders regarding changes to risk 

management and other services offered 

by the registered clearing agency.300 The 

Commission proposed Rule 17Ad–255(j) 

to help promote the formalization of 

these processes and structures to help 

ensure their ongoing use, both for the 

existing set of registered clearing 

agencies and for potential future 

registrants.301 Registered clearing 

agencies that have already established 

such structures generally should 

evaluate their own internal processes, 

including their approach to observing 

Rules 17Ad–252(e)(2)(iii) and (vi) if 

applicable, and determine to what 

extent any additional steps need to be 

defined, formalized, or otherwise 

undertaken to ensure compliance with 

Rule 17Ad–255(j). In contrast to existing 

rules for covered clearing agencies, Rule 

17Ad–255(j) establishes new 

requirements for written policies and 

procedures reasonably designed to 

require the solicitation, consideration, 

and documentation of the consideration 

of the view of stakeholders regarding 

certain material developments. The 

specific requirements with respect to 

solicitation and documentation do not 

exist in Rule 17Ad–252(e)(2) and 

therefore the new requirements are not 

redundant. The requirements are also 

not overly prescriptive or likely to 

reduce the ability of each unique 

covered clearing agency to develop the 

necessary stakeholder inputs because 

the registered clearing agencies would 

have the discretion to determine the 

appropriate approach to solicitation and 

documentation relating to stakeholder 

views. Because Rule 17Ad–255(j) is not 

duplicative of requirements in Rule 

17Ad–252(e)(2), the Commission is also 

not modifying Rule 17Ad–255(j) for 

covered clearing agencies in response to 

these comments. 

In asserting that proposed Rule 17Ad– 

255(j) is duplicative of existing 

requirements, several commenters cited 

Exchange Act Rule 19b–4, which 

generally requires a registered clearing 

agency, as an SRO, to submit proposed 

changes to its rules, policies, and 

procedures to the Commission for 

review, a process which includes 

publication and a solicitation of public 

comments.302 In addition, commenters 

also cited requirements under the DoddFrank Act for registered clearing 

agencies that are SIFMUs to file an 

advance notice of certain material 

changes, which are also subject to 

public comment.303 Another commenter 

stated its belief that, with respect to the 

solicitation of risk-based viewpoints, 

these existing requirements for SROs 

and SIFMUs are sufficient.304 Finally, 

one commenter explained that clearing 

agencies dually registered as DCOs with 

the CFTC are subject to requirements for 

CFTC approval under CFTC regulations 

at 17 CFR 40.5 and 17 CFR 40.6 that 

provide market participants with 

opportunities to review and comment 

on modifications to rules, procedures, or 

operations.305 The commenters believe 

that, because the above-described filing 

processes for proposed changes already 

solicit feedback from the public 

regarding material issues that affect a 

registered clearing agency, Rule 17Ad– 

255(j) would be duplicative of these 

existing requirements.306

The Commission is not modifying 

Rule 17Ad–255(j) in response to the 

commenters because soliciting public 

comments relating to a registered 

clearing agency’s rule filings and 

advance notices, and the clearing 

agencies’ consideration of stakeholder 

views as proposed in Rule 17Ad–255(j), 

are two different processes with wholly 

separate and distinct purposes. The 

Commission explained in the 

Governance Proposing Release that clear 

and transparent governance 

arrangements help optimize the 

registered clearing agency’s decisions, 

rules, and procedures because 

transparency in the registered clearing 

agency’s internal governance process 

improves the quality of information 

shared with its participants and 

stakeholders, thereby improving the 

ability of public commenters to provide 

meaningful comments on proposed rule 

changes submitted to the Commission or 

CFTC in one of the above-described 

filing processes.307 In particular, it is 

beneficial for registered clearing 

agencies to exchange information and 

consider stakeholder views at any 

appropriate time to enhance 

transparency and the quality of the 

proposed rule, and not only after the 

proposed rule has been published for 

public comments. Because these 

represent two distinct steps to enhance 

transparency, as well as two distinct 

processes with different objectives, 

soliciting and considering stakeholder 

viewpoints is not duplicative of existing 

requirements. For the reasons stated 

above, the Commission is not modifying 

Rule 17Ad–255(j) in response to these 

comments because the proposed 

requirements are not duplicative or 

redundant of the existing filing 

processes cited by commenters. 

3. Proposed Scope of ‘‘Governance and 

Operations’’ 

Several commenters explained that 

the scope of the proposed rule should 

focus on material developments which 

may impact a registered clearing 

agency’s risk profile or risk 

management, and not ‘‘governance and 

operations.’’ 308 First, one commenter 

stated that the reference to ‘‘governance 

and operations’’ is overly broad and 

vague.309 Additionally, the commenter 

explained that it was unclear whether a 

registered clearing agency would be 

required to solicit, consider, and 

document views from participants and 

relevant stakeholders before executing 


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310The commenter identified the following 

measures: hiring a new member of the senior 

management team, hiring a new management level 

committee with authority to make 

recommendations to the board, selecting a new 

director, selecting a new outside auditor, or 

determining the scope of its internal audit plan. See 

id. 

311See id. 

312See id. 

313See supra Part II.F.2 and note 303 (also 

discussing the requirements in the Dodd-Frank Act 

for SIFMUs to submit advance notices to their 

designated supervisory authority). 

314See CCP12 at 9. 

315See id. 

316See CCP12 at 9–10 (explaining that a ‘‘clearing 

agency’s first priority is to contribute to the stability 

of the broader financial markets, that ‘‘a clearing 

agency is a risk-manager—not a risk-taker—and 

supports financial stability by effectively managing 

the risks of its market participants’’ and that 

‘‘[m]arket participants, on the other hand, do not 

have the same regulatory objective of prioritizing 

financial stability in their day-to-day operations’’). 

317See LSEG at 15. 

318See DTCC at 3. 

319See DTCC at 14 (stating that ‘‘risk 

management’’ would also capture the broad swathe 

of issues and topics noted by the Commission in the 

Governance Proposing Release as being of interest 

to the broader universe of participants and 

stakeholders in a registered clearing agency, 

including financial risk management, cyber and 

operational resiliency, default management, and the 

potential introduction of new cleared products or 

services). 

320See DTCC at 13 (stating that ‘‘we also believe, 

in considering the question of what gaps persist in 

stakeholder input to governance, that the 

Commission should more purposefully consider all 

of the various existing channels that currently exist 

for such input: namely, the self-regulatory 

organization proposed rule change notice and 

SIFMU advance notice requirements.’’). 

321See Barclays et al. at 2 (recommending a 

requirement to establish risk working groups as a 

forum to seek risk-based input from a broad array 

of market participants); SIFMA at 3–4 (suggesting 

a requirement that registered clearing agencies 

formally establish one or more risk working groups 

to provide a forum for them to seek risk-based input 

from a broad array of market participants, including 

participant members and their clients). 

on certain measures,310 which according 

to the commenter represent core 

functions for which the board is 

required to exercise its considered 

discretion in the interests of the 

registered clearing agency.311 Instead, 

the commenter explained that such a 

requirement should be tailored to 

address those changes that represent a 

risk to the registered clearing agency’s 

core clearance and settlement 

operations, and the commenter 

recommended that the Commission 

accomplish that goal by modifying the 

language of the proposed rule to narrow 

the scope of changes from those that 

represent ‘‘material developments’’ in 

‘‘governance or operations’’ to those that 

‘‘could materially affect the level or 

nature of risk presented by the 

registered clearing agency.’’ 312 In the 

commenter’s view, this would be 

consistent with existing requirements 

for registered clearing agencies that are 

SIFMUs to submit to the Commission 

for public notice and comment any 

changes to operations or procedures that 

could materially affect the level or 

nature of risk presented by the 

registered clearing agency.313

Second, another commenter 

recommended that the registered 

clearing agency focus on the solicitation 

of risk-based viewpoints on matters that 

would materially affect a registered 

clearing agency’s risk profile and related 

risk management and to not solicit input 

on every topic on which stakeholders 

wish to have input (e.g., participation 

requirements, fees, new technologies, 

and services).314 The commenter further 

stated that governance of a registered 

clearing agency should be within the 

sole purview of the registered clearing 

agency itself, as long as the registered 

clearing agency complies with 

regulatory requirements and applicable 

laws and appropriately considers the 

interests of customers of clearing agency 

participants and objectives of owners 

and participants on matters that 

materially impact a registered clearing 

agency’s risk profile.315 Regarding 

governance, this commenter also stated 

that it is imperative to ensure that 

market participants’ involvement in 

clearing agency governance, including 

through the RMC, is limited to riskbased viewpoints (as opposed to, for 

example, commercially-driven 

viewpoints), due to the differing 

objectives between a registered clearing 

agency and its participants in their 

respective day-to-day operations.316

The third commenter stated that 

whereas it is common practice for 

clearing agencies to solicit feedback on 

operational matters such as rule 

changes, prospective enhancement to 

services or risk management, and fee 

changes, the governance structure of the 

clearing agency, where they meet 

regulatory requirements, is a matter for 

the board, executives and majority 

shareholders where such clearing 

agency forms part of a wider group.317

The fourth commenter stated that 

scoping the requirements to material 

changes in the ‘‘governance and 

operations’’ of a registered clearing 

agency is overly broad with the likely 

result that registered clearing agency 

governance will become less dynamic 

and responsive to changes and risks in 

the markets they serve.318 Therefore, the 

commenter’s recommendation is that 

the Commission modify the scope of the 

proposed requirements to ‘‘risk 

management,’’ instead of ‘‘governance 

and operations.’’ The commenter further 

elaborated that referencing ‘‘risk 

management’’ should be effective in 

capturing the broad swathe of issues 

and topics described by the Commission 

in the proposing release as being of 

interest to the broader universe of 

participants and stakeholders in a 

registered clearing agency.319 Regarding 

whether gaps may persist in stakeholder 

input related to governance, this 

commenter also recommended that the 

Commission consider all of the various 

channels that currently exist for such 

input (citing, for example, the various 

filing processes for proposed rule 

changes previously described in Part 

II.F.2).320 Finally, two commenters 

recommended modifying the rule to 

specifically require risk-based input via 

RWGs to ensure input from a broad 

range of market participants and other 

stakeholders.321

In proposing Rule 17Ad–255(j), the 

Commission described the scope of the 

rule as ‘‘governance and operations’’ 

because these categories would address, 

in a comprehensive way, the clearance 

and settlement operations of registered 

clearing agencies without being overly 

prescriptive. However, permitting input 

into governance matters may, for 

example, require the board to disclose to 

participants and other relevant 

stakeholders sensitive or non-public 

information that impacts only the 

registered clearing agency. The 

Commission also agrees that the broad 

scope of ‘‘governance’’ may burden the 

registered clearing agency unnecessarily 

with the consideration of proposals and 

concerns that impede the ability of the 

board or the registered clearing agency 

to prioritize effectively its risk 

management function. 

Accordingly, in adopting Rule 17Ad– 

255(j), the Commission is modifying the 

rule to specify viewpoints as to ‘‘risk 

management and operations’’ rather 

than ‘‘governance and operations.’’ 

Although some commenters 

recommended that the Commission 

replace both terms ‘‘governance and 

operations’’ with ‘‘risk management,’’ it 

is appropriate to retain ‘‘operations,’’ 

because not all operational functions 

that directly affect participants and 

other stakeholders clearly fall within the 

concept of ‘‘risk management.’’ 

Specifically, although topics associated 

with operational risk management 

would fall within the scope of ‘‘risk 

management’’ more generally, the basic 

operations of the registered clearing 

agencies relating to functions of the 

clearing agency (e.g., the design and 

functioning of the processes and 

technology systems that support the 

infrastructure of the registered clearing 


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322See ISDA at 5 (‘‘These groups should discuss 

all relevant topics to CCP risk management that 

impact on their participants’ own risk management, 

including, but not limited to: New Products, 

Operational Changes, Membership criteria, Default 

Management, Risk Framework, including margin 

models and stress testing scenarios, non-default loss 

mitigation and provisions, and recovery.’’). 

323See SIFMA AMG at 6 (recommending that 

matters required to be brought to the RMC and RWG 

include all matters and proposed changes to rules, 

procedures, or operations that could materially 

affect the risk profile of the clearing agency, 

including, but not limited to, any material change 

to its risk model, default procedures, participation 

requirements, and risk management practices, as 

well as the clearing of new products that could 

significantly impact its risk profile). 

324See SIFMA AMG at 5. 

325See, e.g., 17 CFR 240.17Ad–22(e)(2)(ii), (iii) 

(requiring a covered clearing agency to establish, 

implement, maintain and enforce written policies 

and procedures reasonably designed to provide for 

governance arrangements that clearly prioritize the 

safety and efficiency of the covered clearing agency 

and support the public interest requirements in 

section 17A of the Exchange Act, applicable to 

clearing agencies). 

326See ISDA at 6 (‘‘[A]s it is very difficult to 

define what material changes are, we support 

principle-based rules and see a strong role of 

supervision. The Commission could also define 

examples of what changes would be material to 

provide more guidance to the clearing agency.’’). 

327See LSEG at 15. 

agency itself, and the way that 

participants and other stakeholders 

connect to such systems) may not. It is 

appropriate to enable participants and 

other stakeholders to have input into 

matters that may be purely operational 

relating to functions of the clearing 

agency, including how to access 

systems. 

One commenter stated that clearing 

agencies should widely consult on any 

material changes to their risk profile 

and, in addition, recommended that all 

relevant topics relating to clearing 

agency risk management be discussed 

with an RWG or similar fora.322

Similarly, another commenter stated 

that all matters and proposed changes 

related to the registered clearing 

agency’s rules, procedures, and 

operations that could materially affect 

the risk profile of the clearing agency 

including, but not limited to, any 

material changes to the risk model, 

default procedures, participation 

requirements, and risk management 

practices, as well as the clearing of new 

products that could significantly impact 

the clearing agency’s risk profile, should 

be presented to the RWG for 

consideration.323 Regarding these 

comments, the Commission is not 

limiting the scope of Rule 17Ad–25(j) to 

defined risk management categories 

such as default management, new 

products or margin methodologies. 

Rather, the clearing agencies should 

have the discretion to determine the 

appropriate topics within risk 

management and operations relating to 

the functions of the clearing agencies 

and determine whether these changes 

are material developments under the 

broader direction of soliciting feedback 

regarding ‘‘operations and risk 

management.’’ In the Commission’s 

view, the topics identified by 

commenters generally should be the 

types of topics relating to the functions 

of the clearing agency on which a 

registered clearing agency solicits 

feedback. 

Another commenter stated that, to 

better clarify the expected perspective to 

be applied by RMC and RWG members, 

the Commission should explicitly state 

that in addition to supporting the safety 

and efficiency of the registered clearing 

agency, RMC and RWG members should 

also support the stability of the broader 

financial system.324 The Commission is 

not modifying, in connection with the 

comment, that the proposed rule on 

stakeholder viewpoints should include 

a provision which requires RWGs to 

consider the safety and efficiency of the 

registered clearing agency as well as the 

stability of the broader financial system. 

The purpose of the proposed rule, as 

stated above, is for registered clearing 

agencies to solicit, consider, and 

document their consideration of the 

views of participants and other relevant 

stakeholders regarding material 

developments in their risk management 

and operations. Given the varied 

composition of the fora or RWG, which 

may include clearing agency 

participants and other stakeholders 

including customers of clearing agency 

participants and other industry 

participants, the interests of each of 

these groups may not be perfectly 

aligned with the registered clearing 

agency relating to the safety and 

efficiency of the registered clearing 

agency or even with broader financial 

stability measures. In this sense, the 

commenter may be seeking to better 

align disparate interests between 

stakeholders and the registered clearing 

agencies in connection with supporting 

the safety and efficiency of the 

registered clearing agency as well as the 

stability of the broader financial system; 

however, pursuant to Commission rules, 

registered clearing agencies already 

have obligations to support safety and 

efficiency, as well as the public interest 

requirements in section 17A of the Act, 

throughout their governance processes 

and not only with respect to soliciting 

feedback.325 Given their relatively wider 

view of market practices and market 

dynamics, registered clearing agencies 

may be better positioned to assess 

safety, soundness, and financial stability 

than their participants or other 

stakeholders, and so adding such a 

requirement applicable to stakeholder 

viewpoints as a whole may dampen 

interest in or participation in such 

stakeholder outreach, limiting the 

registered clearing agency’s ability to 

continue to collect and consider the 

wide range of information that is 

uniquely available to it. Instead, 

registered clearing agencies should 

structure and design the fora to address 

the markets and products they serve so 

that they can gather useful information 

effectively. As a result, the Commission 

is not modifying the scope of the 

proposed rule to include more granular 

elements or a reference to the stability 

of the broader financial system. 

One commenter sought clarity on 

‘‘material’’ changes that require 

stakeholder viewpoints and 

recommended that the Commission 

provide more guidance on what changes 

would be material.326 Given materiality 

may differ across clearing agencies as 

well as the products cleared, clearing 

agencies should have the discretion and 

responsibility to determine whether a 

development in their risk management 

and operations is material in the context 

of their own operations. Pursuant to 

Rule 17Ad–25(j), a registered clearing 

agency would be required to establish 

written policies and procedures in 

compliance with the rule, and those 

policies and procedures therefore would 

also need to clearly define material 

developments. Given this policies and 

procedures requirement, a registered 

clearing agency could make clear in any 

outreach to participants and other 

stakeholders how it has defined such 

material developments. The 

Commission is not modifying Rule 

17Ad–255(j) to provide more specificity 

as to what constitutes materiality. 

Finally, one commenter expressed the 

view that the board’s fiduciary duty to 

the clearing agency would not conflict 

with the proposed requirements in Rule 

17Ad–255(j) but that it may need to 

conduct further legal analysis on this 

point under the relevant local 

requirements in its jurisdiction.327 In 

the Commission’s view, soliciting and 

considering stakeholder views relating 

to operations and risk management 

helps the board to fulfill its fiduciary 

duty to the registered clearing agency 

because it helps the board to collect 

information from affected stakeholders 

regarding the clearing agency’s core risk 

management function. 


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328See, e.g., LSEG at 15 (‘‘This should be 

determined on a case-by-case basis depending on 

the topic and materiality to the clearing agency and 

to its members/relevant stakeholders.’’); CCP12 at 

10 (stating that the rule should not specify how 

often the clearing agency needs to solicit 

viewpoints or how consideration of these 

viewpoints needs to be documented). 

329See LSEG at 15. 

330See SIFMA AMG at 5. 

331See CCP12 at 10. 

332See id. 

333See ISDA at 5. 

334See SIFMA at 4. 335 Id. 336See ICI at 5. 337See DTCC at 13 (seeking to understand 

whether the Commission expects registered clearing 

agencies to treat stakeholder engagements under 

proposed Rule 17Ad–255(j) as ‘‘any correspondence 

or other communications reduced to writing 

(including comment letters) to and from such 

[registered clearing agency] concerning the 

proposed rule change’’ as required by the General 

Instructions to Form 19b–4 and expressing concern 

that applying such an interpretation ‘‘would likely 

chill open and frank discussions between the 

clearing agency and the stakeholder groups,’’ as 

well as ‘‘increase the costs and burdens to the SRO 

rule filing process for registered clearing agencies’’). 

338See id. 

339See supra Part II.F.1. 

4. Frequency and Method of Outreach 

Several commenters stated that the 

Commission should not specify the 

frequency with which clearing agencies 

solicit viewpoints from participants and 

other stakeholders.328 One commenter 

specifically stated that the frequency 

should depend on the topic and its 

materiality to the clearing agency, 

clearing agency participants, and 

relevant stakeholders.329 Another 

commenter stated that RWGs should be 

deployed only on an as-needed basis to 

assess the same issues as those 

considered by the RMC.330 A third 

commenter stated that a more 

prescriptive requirement for the 

frequency of obtaining feedback could 

force registered clearing agencies to 

solicit stakeholder viewpoints even 

when there are no material matters to 

discuss, solely to satisfy a regulatory 

requirement.331 From the commenter’s 

perspective, the frequency of 

solicitation should be determined based 

on when topics arise that could have a 

material impact on the risk profile of the 

clearing agency, which will inherently 

vary across clearing agencies. This 

commenter also stated that not requiring 

a minimum frequency for soliciting 

viewpoints is more efficient and could 

lead to more active participation when 

viewpoints are solicited.332

The Commission agrees that clearing 

agencies should retain discretion when 

considering how frequently and via 

what mechanism to engage with 

participants and other stakeholders, as 

the most appropriate timing and 

mechanism are likely to vary by topic, 

informed in part by the markets served 

and products cleared. Therefore, the 

Commission is retaining in final Rule 

17Ad–255(j) the reference to 

‘‘recurring,’’ and is not modifying the 

proposed rule by specifying the 

frequency of any solicitations or 

outreach. 

One commenter specifically 

recommended that consultation with 

market participants should be required 

prior to a clearing agency filing rules 

with the Commission.333 Similarly, 

another commenter suggested that the 

Commission encourage registered 

clearing agencies to publicly consult on 

any proposals affecting their risk 

management practices before filing them 

as proposed rule changes with the 

Commission.334 As an example, the 

commenter cited current practice at the 

Financial Industry Regulatory Authority 

(‘‘FINRA’’) to consult on significant 

changes to its own SRO rules when 

those rules would change the 

compliance obligations of its members, 

suggesting that the Commission and 

registered clearing agencies consider 

FINRA’s model as a potentially 

workable approach.335 Finally, one 

commenter also recommended that the 

clearing agencies consult with a ‘‘broad 

spectrum’’ of market participants prior 

to submitting a rule change.336 Although 

the Commission recognizes the benefits 

of consulting with participants and 

other stakeholders prior to proposed 

changes that concern key elements of 

risk management functions or 

operations, registered clearing agencies 

are best positioned to assess when to 

conduct such outreach and accordingly, 

the rule should not mandate such 

consultations. Rather, clearing agencies 

would be required to consult with 

participants and other stakeholders 

regarding material developments in its 

risk management and operations on a 

recurring basis. Depending on the scope 

and materiality of the proposed rule 

change, the registered clearing agency 

can ultimately determine whether to 

consult with participants and other 

stakeholders. As a result, the 

Commission is not modifying the 

proposed rule to provide more 

specificity regarding the timing of the 

outreach with stakeholders in response 

to these comments. 

One commenter asked the 

Commission to clarify expectations 

regarding the method of communication 

with participants and other stakeholders 

and, specifically, whether written 

consultation conducted pursuant to 

Rule 17Ad–255(j) would need to be 

disclosed pursuant to Form 19b–4.337 If 

the latter, the commenter stated that this 

would adversely impact 

communications between the clearing 

agency and stakeholders and increase 

costs and burdens relating to the SRO 

rule filing process for registered clearing 

agencies.338

As previously discussed, proposed 

Rule 17Ad–255(j) would require each 

registered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to solicit, consider, 

and document its consideration of the 

views of participants and other relevant 

stakeholders.339 Therefore, registered 

clearing agencies would have discretion 

in the design and structure of 

stakeholder outreach including the 

method of communication (e.g., use of 

an advisory group or council, other 

types of in-person meetings, and written 

correspondence). Additionally, although 

a clearing agency must establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to require the board 

of directors to solicit and consider 

viewpoints of participants and other 

relevant stakeholders, nothing in the 

rule prohibits the board of directors 

from obtaining assistance in soliciting 

viewpoints of participants and other 

relevant stakeholders from staff of the 

registered clearing agencies. Although 

registered clearing agencies may 

determine the appropriate method of 

communication under Rule 17Ad– 

255(j), whether such discussions must 

ultimately be disclosed pursuant to 

Form 19b–4 would turn on the specific 

facts and circumstances of any such 

written correspondence. As previously 

discussed in Part II.F.2, Rule 17Ad– 

255(j) and the process for filing by SROs 

of proposed rule changes serve 

distinctly different purposes and so 

engagement under Rule 17Ad–255(j) 

may (or may not) implicate 

corresponding obligations regarding 

disclosure on Form 19b–4. Accordingly, 

Rule 17Ad–255(j) need not be modified 

at adoption to include more specific 

requirements on the method of 

communication with stakeholders. 

5. Use of Fora To Satisfy the Rule 

As stated in the Governance 

Proposing Release, the Commission 

recognized that many registered clearing 

agencies already have established 

committees, working groups, and other 

fora of varying size, scope, and formality 

to share and solicit information with 

clearing agency participants, the 

customers of clearing agency 

participants, and other stakeholders 

regarding changes to risk management 


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340See Governance Proposing Release, supra note 

2, at 51838. 

341See CCP12 at 8. 

342See id. 

343See ISDA at 5. 

344See SIFMA AMG at 5 (‘‘To better clarify the 

requirement for ‘participant’ membership, the 

Commission should explicitly require that RMCs 

and RWGs include the independent views of 

representatives of clearing members and clearing 

member customers . . .’’); Citadel at 1 (supporting 

the proposed requirement for registered clearing 

agencies to implement written policies and 

procedures to solicit and consider the views of 

participants (including customers of direct 

members) regarding material developments in 

governance and operations because there may be 

circumstances where the interests of the clearing 

agency, its direct members, and customers are not 

fully aligned, and explaining that such a 

requirement will result in fairer and more informed 

decision-making, and ultimately more confidence 

in the clearing infrastructure). 

345See SIFMA AMG at 5. 

346See Barclays et al. at 2 (recommending a 

requirement for risk working groups as a forum to 

seek risk-based input from a broad array of market 

participants to ensure that all market participants 

can freely represent the views of their firms and 

other similarly situated market participants). 

347See ICI at 5. 

348See supra Part II.F.1; see also Governance 

Proposing Release, supra note 2, at 51838. 

349Better Markets at 21. 

350See id. 

and other services offered by the 

registered clearing agency.340 These fora 

are useful tools for information sharing 

and help to promote an open dialogue 

between various stakeholders. 

The Commission received several 

comments relating to the formation of 

fora (or RWGs) in connection with 

stakeholder viewpoints. First, one 

commenter explained that registered 

clearing agencies must have the 

flexibility to determine the appropriate 

structure and use of these groups in a 

way that best serves their risk 

management needs and the markets that 

they serve.341 From the commenter’s 

perspective, prescribing granular 

requirements would reflect a shift away 

from principles-based rules and would 

be highly concerning given the diversity 

in number and types of fora that 

registered clearing agencies already use 

to solicit stakeholder input. The 

commenter stated that the Commission 

should defer to the registered clearing 

agency’s discretion to determine how 

best to obtain and consider stakeholder 

input and not include in the rule 

granular requirements for the 

committees, working groups, and other 

fora.342 The Commission agrees with the 

comment that clearing agencies should 

have the flexibility to determine the 

most appropriate structure for the use of 

fora or RWGs to ensure that these fora 

are effectively designed to address the 

risk management needs of the registered 

clearing agency, and therefore the 

Commission is not modifying the 

proposed rule to include specific 

requirements. 

One commenter stated that the 

clearing agency should not select the 

participants of the fora, but allow 

representatives of the clearing agency 

participants and, depending on the 

topic, also customers of clearing agency 

participants and other stakeholders, to 

freely join these fora.343 Some 

commenters indicated that these fora 

should include representatives from 

both clearing agency participants and 

their customers.344 Another commenter 

recommended that the RWGs be 

composed of experts with knowledge of 

specific risk issues.345 Finally, one 

commenter recommended that the 

Commission require the establishment 

of RWGs to seek input from a broad 

array of market participants so all 

market participants can freely represent 

the view of their firms and other 

similarly situated market 

participants.346 In response to these 

comments, although stakeholders may 

include a wide range of clearing agency 

participants, customers of clearing 

agency participants, and other 

stakeholders, as discussed in the 

Governance Proposing Release, the 

proposed rule would require each 

registered clearing agency to establish 

and enforce written policies and 

procedures reasonably designed to 

solicit, consider, and document its 

consideration of the views of 

participants and other relevant 

stakeholders. Depending on the topic 

and issue or scope of issues under 

discussion, the registered clearing 

agency may occasionally need to reach 

out to a select group to obtain the 

appropriate amount of stakeholder 

input. As such, the Commission did not 

require specific fora participation in the 

proposed rule because the process for 

clearing agencies to effectively collect 

and consider stakeholder views could 

be adversely impacted. For those same 

reasons, the Commission is not 

modifying the rule to specify the 

composition of or qualifications for 

participation in such fora. 

Several commenters expressed the 

view that the rule should specify the 

composition of fora to ensure 

participation by customers of clearing 

agency participants and other end users. 

One commenter recommended that the 

RWG’s membership include a 

meaningful proportion of customers of 

clearing agency participants to promote 

broad and fair representation of end 

users’ risk-based views and input vis-avis other market participants.347

Specifically, to obtain a ‘‘meaningful 

proportion,’’ the commenter 

recommended that the Commission 

adopt selection parameters that would 

ensure a cross-section of customers 

representing a meaningful level of 

customer risks are included. As 

previously discussed,348 the 

Commission’s view is that other 

relevant stakeholders generally would 

include investors, customers of clearing 

agency participants, and securities 

issuers. However, registered clearing 

agencies should have the discretion to 

determine the appropriate design and 

structure of the fora to address any 

material developments relating to risk 

management and operations, including 

the appropriate proportion of customers 

of clearing agency participants, because 

not all topics relating to risk 

management and operations will 

necessarily impact customers of clearing 

agency participants and other types of 

stakeholders. The Commission therefore 

is not modifying the rule to provide 

additional specification that a 

meaningful proportion of customers of 

clearing agency participants be 

represented within stakeholder views. 

Nonetheless, a registered clearing 

agency generally should endeavor to 

solicit viewpoints from a representative 

cross-section of affected parties. 

Another commenter stated that the 

proposed rule did not specify the 

consideration of views held by small 

participants, or even a certain range of 

participants, and that mere 

‘‘consideration’’ requirements would be 

subject to influence by boards, which 

the commenter explained would be 

beholden to large broker-dealers that 

serve increasingly concentrated 

markets.349 From this commenter’s 

perspective, the requirement to consider 

stakeholder views does nothing to 

remedy potential vulnerabilities in the 

nomination process or the broader 

independence requirement. The 

commenter stated that only more 

prescriptive interventions can remedy 

the underlying problem of director 

independence.350 Because the types of 

participants, as well as their 

comparative sizes, vary significantly 

across the markets served by the 

different registered clearing agencies, 

registered clearing agencies should have 

the discretion to determine the 

appropriate design and structure of the 

fora including the consideration of 

small participants and a range of 

participants. Therefore, the Commission 

is not modifying Rule 17Ad–255(j) in 

response to the comment regarding the 

inclusion of small participants and 

range of participants. As to the 

commenters’ concerns regarding the role 


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351See SIFMA AMG at 6. 

352See SIFMA AMG at 4. 

353See id. at 4–5. 

354See supra notes 342–346 and accompanying 

text. 

355See CCP12 at 10 (stating that a clearing agency 

should document its consideration of viewpoints 

received, but that each clearing agency should have 

the discretion to determine the appropriate level of 

documentation to balance the need for efficiency 

with the need to document and disseminate its 

consideration of these viewpoints, and that this is 

currently a standard practice). 

356See ISDA at 5; Barclays et al. at 2. 

357See infra Part IV.C.6 (discussing the economic 

effects of the rule) and V.G (discussing the PRA 

burdens estimated for the rule). 

358See ISDA at 5. 

359See id. at 6 (‘‘To the degree that the RWG (or 

a similar forum) expresses dissenting views with 

regard to a clearing agency’s material risk decisions, 

or the clearing agency is not following advice of the 

RWG, those dissenting views should be 

documented and shared with regulators, including 

the CCP’s rationale for not accommodating them.’’). 

360See Barclays et al. at 2 (stating that ‘‘as the 

proposal rightly observes, such a requirement 

would help promote confidence in the use of 

participant forums, promote an open dialogue and 

greater understanding between the clearing agencies 

and participants and also help the Commission 

evaluate the ways in which clearing agencies 

consider stakeholder viewpoints and balance 

potentially competing viewpoints’’). 

361See ICI at 5. 

of large and small participants in the 

context of board composition and the 

nominating committee, the Commission 

previously addressed these concerns in 

Part II.B.3. 

One commenter stated its support for 

contributions by RWGs that reflect a 

risk-based, independent, and informed 

opinion; requested that the Commission 

be explicit that the clearing agency 

participants and customers of clearing 

agency participants are representing the 

perspectives of their employers; and 

expressed support for the Commission 

requiring a principles-based approach 

whereby a registered clearing agency 

shall employ proportionate measures to 

mitigate the potential risk of a misuse of 

confidential information.351 Although 

the Commission generally agrees that 

contributions should be risk-based, 

independent, and informed, when 

providing such risk-based input, the 

Commission is not revising the rule to 

prescribe that fora be used or how such 

fora ought to be structured to give 

registered clearing agencies discretion 

in how they treat sensitive or 

confidential information to avoid 

hampering or discouraging participant 

or other stakeholder participation in 

such fora. As a result, the Commission 

is not modifying Rule 17Ad–255(j) to 

include more prescriptive requirements 

regarding how to participate in fora 

established to achieve compliance with 

the rule. By comparison, the 

Commission has considered, and in 

some cases included, such requirements 

in the context of the board RMC under 

Rule 17Ad–255(d), as discussed in Part 

II.C. 

One commenter specified that the 

Commission should explicitly require 

registered clearing agencies to establish 

one or more risk advisory groups, which 

would have a larger membership than 

the RMCs and could meet as needed for 

specific issues to advise the RMCs.352

Moreover, the commenter stated that the 

Commission should explicitly require 

RWG membership be subject to fitness 

standards and that the membership 

within each constituency rotate on a 

three-year basis to welcome diverse 

views while preserving continuity of 

expertise.353 The commenter 

acknowledges that fitness standards 

may vary across the registered clearing 

agencies due to business models or 

otherwise, but stated that a foundational 

level of risk management expertise must 

be a consistent requirement. As stated 

above,354 the design and structure of the 

fora including but not limited to 

composition, fora count, fora rotation, 

and fitness standards specifying the 

level of risk management expertise are 

best determined by the clearing agencies 

themselves because they have unique 

insight into how issues or emerging 

topics might impact their participants 

and other stakeholders. Therefore, the 

Commission is not modifying the 

proposed rule to add specific 

requirements with respect to fora 

formation. 

6. Documentation of Stakeholder Views 

One commenter stated that although a 

clearing agency generally should 

document its consideration of 

stakeholder viewpoints, each clearing 

agency should have the discretion to 

determine the appropriate level of 

documentation.355 Two commenters 

also stated that requiring clearing 

agencies to document their 

consideration of participant viewpoints, 

and thereby ensure that a record of such 

viewpoints exists and has been 

evaluated as to their merits would be 

beneficial.356 The Commission agrees 

that documenting the consideration of 

stakeholder viewpoints helps build a 

record of the reasons certain actions 

have been taken over time by the 

registered clearing agency and therefore 

helps promote thoughtful and consistent 

decision-making over time. While each 

registered clearing agency will be 

required to document its consideration 

of the views of participants and other 

relevant stakeholders, each registered 

clearing agency may determine the 

appropriate level of details relating to 

the documentation of its consideration 

of stakeholder viewpoints to ensure that 

the potential burdens associated with 

the documentation process, and the 

resulting time it adds to the decisionmaking process, do not undermine the 

benefits of soliciting viewpoints from 

relevant stakeholders.357 As a result, no 

modifications are necessary to the 

proposed documentation requirement. 

Another commenter stated that there 

should be minutes of each meeting 

relating to RWG or similar fora, which 

ideally could be made public, or at least 

be shared with all interested clearing 

agency participants and customers of 

clearing agency participants.358

Furthermore, the commenter 

recommended that any dissenting views 

be documented and shared with 

regulators, including the clearing 

agency’s rationale for not 

accommodating such views.359

Similarly, another commenter 

recommended that clearing agency 

participants’ and end users’ feedback be 

disclosed to regulators.360 Finally, 

another commenter recommended that 

registered clearing agencies be required 

to respond to market participant 

feedback, specifically in scenarios 

where the feedback has not been 

incorporated into the registered clearing 

agency’s decision.361

Documenting the consideration of 

viewpoints from stakeholders (including 

minutes) ensures that a record exists of 

the viewpoints provided by relevant 

stakeholders. However, the requirement 

for the board to ‘‘consider’’ the views of 

participants and other relevant 

stakeholders may not in all cases result 

in action by the registered clearing 

agency. A registered clearing agency 

generally should endeavor to ensure 

that it has a complete and accurate 

record of input received, particularly 

when the registered clearing agency 

determines that the most appropriate 

action is action with which some 

participants or other key stakeholders 

disagree. However, in the context of 

soliciting viewpoints, each registered 

clearing agency should have discretion 

to determine, in its policies and 

procedures, the appropriate level of 

detail relating to documentation across 

the different mechanisms used to solicit 

viewpoints, whether through an 

advisory group or other fora, survey, or 

other written correspondence, while 

generally endeavoring to ensure that it 

has a complete and accurate record of 

input received. Documentation of 

stakeholder viewpoints under Rule 

17Ad–255(j) would constitute records of 


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362The Commission notes that Rule 17Ad–255(d), 

as discussed in Part II.C, would require the 

establishment of a board-level RMC, whereas CFTC 

regulations do not specifically require that the RMC 

be a board-level committee. 

363See ICI at 4 (stating that ‘‘First, we recommend 

that the SEC harmonize its proposal with the 

CFTC’s more prescriptive approach to RMCs and 

RWGs.’’). 

364See SIFMA AMG at 5 (stating that, given the 

relative infrequency of the board’s meetings with 

the more senior members of the RMC, the 

Commission should adopt the requirement to also 

establish RWGs in a manner similar to the CFTC, 

including representatives from both clearing 

members and clearing member customers, 

explaining that the RWGs could be composed of 

experts with knowledge of specific risk issues and 

be able to be deployed on an as-needed basis to 

assess the same issues assigned to RMCs, but on a 

deeper basis). 

365See SIFMA at 3–4. 366 In addressing the relationship between the 

CFTC’s requirements for the RMC and the 

Commission’s own Rule 17Ad–255, Part II.C 

discusses in more detail how Rule 17Ad–255 is 

intended to bolster the overall quality of governance 

(and therefore risk management) at a registered 

clearing agency to achieve substantially similar 

outcomes to the CFTC requirements. 

367For example, registered clearing agencies may 

instead be central securities depositories, which 

perform different functions from CCPs and do not 

collect margin. 

368See supra notes 342–346 and accompanying 

text. 

the registered clearing agency, and 

therefore be subject to review and 

examination by representatives of the 

Commission upon request. 

With respect to meeting minutes, a 

registered clearing agency generally 

should endeavor to disclose their 

contents as fully as possible, though the 

Commission acknowledges that, due to 

the confidential nature of some of the 

topics discussed regarding risk 

management and operations, it may not 

always be appropriate to share such 

documents in full with the public. 

Furthermore, some stakeholders may 

not be as forthcoming in their feedback 

to registered clearing agencies if all such 

views would be shared automatically 

with the public, such as through posting 

on a public website. 

With respect to responding to 

feedback not taken, it is inappropriate to 

require in Rule 17Ad–255(j) a response 

from the registered clearing agency to 

feedback in cases where the registered 

clearing agency has not incorporated the 

feedback into its final decision. The 

clearing agency may have declined to 

incorporate the feedback for a variety of 

reasons. As a general matter, clearing 

agencies generally should endeavor to 

provide timely feedback and 

explanation in response to stakeholder 

viewpoints, but also retain discretion in 

determining whether and when to 

respond to such views or feedback. The 

Commission therefore is not modifying 

the rule to require documentation 

relating to stakeholder views to be 

disseminated to all registered clearing 

agency participants or the general 

public. 

7. Harmonization With CFTC 

Requirements for RWG 

One commenter recommended that 

the Commission harmonize proposed 

Rule 17Ad–255(j) with the CFTC’s more 

prescriptive approach relating to 

RMCs 362 and RWGs, including by 

adding a requirement to establish 

RWGs.363 Another commenter also 

recommended that the Commission 

adopt requirements for registered 

clearing agencies to establish RWGs in 

a manner similar to CFTC requirements, 

with a corresponding requirement that 

the RWG include representatives from 

both clearing agency participants and 

customers of clearing agency 

participants.364 The commenter also 

recommended that the Commission 

adopt the list of factors that were 

specified in CFTC requirements as 

significantly impacting the registered 

clearing agency’s risk profile, including 

if a new product has different 

margining, liquidity, default 

management, pricing, or other risk 

characteristics from those applicable to 

products already cleared. Finally, one 

commenter, consistent with a 

recommendation by the CFTC’s Market 

Risk Advisory Committee, suggested 

that the Commission include in any 

final rulemaking a requirement that 

registered clearing agencies formally 

establish one or more RWGs to provide 

a forum to seek risk-based input from a 

broad array of market participants, 

including clearing agency participants 

and the customers of clearing agency 

participants.365

In the Commission’s view, the 

differences between the CFTC’s final 

rules at 17 CFR 39.24(b)(12) requiring 

creation of an RWG and proposed Rule 

17Ad–255(j) are appropriate within the 

context of the full set of requirements 

contained in Rule 17Ad–255 and 

considering the different products and 

markets served by registered clearing 

agencies. As a general matter, Rule 

17Ad–255 imposes specific 

requirements onto the board-level RMC 

similar to those contemplated by the 

CFTC but does not specifically require 

creation of an RWG when soliciting 

stakeholder viewpoints.366 Rule 17Ad– 

255(j) also does not require a minimum 

number of meetings or solicitations of 

feedback, though it does similarly 

require documentation of feedback and 

specify the range of parties from whom 

a registered clearing agency must solicit 

feedback, including participants, 

customers of participants, and other 

stakeholders such as securities issuers. 

Despite these differences, the objectives 

of Rule 17Ad–255(j) and the CFTC’s 

rules are the same, and the approaches 

are consistent considering the discretion 

afforded in Rule 17Ad–255(j) for 

developing written policies and 

procedures. For example, in the 

Commission’s view, a registered 

clearing agency generally could 

demonstrate compliance with Rule 

17Ad–255(j) by codifying the creation of 

an RWG under CFTC requirements in its 

written policies and procedures, 

assuming that in so doing it addressed 

the requirements in Rule 17Ad–255(j) to 

solicit, consider, and document its 

consideration of stakeholder viewpoints 

consistent with the rule. 

With respect to the list of factors 

specified in CFTC requirements, the 

approach in Rule 17Ad–255(j) is more 

general, focused on soliciting 

viewpoints regarding ‘‘operations and 

risk management’’ rather than 

identifying more specifically the 

discrete topics that should be 

considered. The two approaches are 

consistent and Rule 17Ad–255(j) is 

appropriately targeted given the range of 

clearing agency functions performed by 

registered clearing agencies, not all of 

which are central counterparties,367 and 

therefore may not be able to 

meaningfully solicit feedback on topics 

like margin or liquidity. 

In connection with the third 

commenter’s request to include 

representatives from both clearing 

agency participants and customers of 

clearing agency participants as well as 

explicitly require that the clearing 

agencies establish one or more RWGs, as 

previously discussed in Part II.F.5 

above,368 the rule considers stakeholder 

feedback from a wide range of 

participants and other stakeholders, 

including customers. However, clearing 

agencies should have the discretion to 

determine the structure and design of 

the fora including the composition and 

the number of fora. 

In consideration of the above, 17Ad– 

255(j) is broadly consistent with the 

CFTC requirements to establish an RWG 

and therefore the Commission believes 

it is unnecessary to modify Rule 17Ad– 

255(j) in adopting the rule to achieve 

harmonization with CFTC rules for 

RWGs. 

III. Compliance Dates 

As proposed, the compliance date for 

Rule 17Ad–255 would be 180 days after 

publication in the Federal Register 

except that the compliance date for 

proposed Rules 17Ad–255(b)(1), (c)(2), 


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369LSEG at 15. 

370 Id. (explaining that its directors serve threeyear terms, suggesting that a longer implementation 

period of three years would provide time for 

complete turnover of the board). 

371See DTCC at 22. 

372Under Exchange Act section 3(f), whenever 

the Commission engages in rulemaking under the 

Exchange Act and is required to consider or 

determine whether an action is necessary or 

appropriate in the public interest, it must consider, 

in addition to the protection of investors, whether 

the action will promote efficiency, competition, and 

capital formation. See 15 U.S.C. 78c(f). In addition, 

section 23(a)(2) of the Exchange Act prohibits the 

Commission from adopting any rule that would 

impose a burden on competition not necessary or 

appropriate in furtherance of the purposes of the 

Exchange Act. See 15 U.S.C. 78w(a)(2). 373See 15 U.S.C. 78q–1(a)(2)(A). 

and (e) would be 24 months after 

publication in the Federal Register. The 

Commission is modifying these 

compliance dates so that the compliance 

date for Rule 17Ad–255 is 12 months 

after publication in the Federal Register, 

except that the compliance date for 

Rules 17Ad–255(b)(1), (c)(2), and (e) is 

24 months after publication in the 

Federal Register, for the reasons 

discussed below. 

First, one commenter recommended 

that the Commission consider a later 

compliance date for Rules 17Ad– 

255(b)(1), (c)(2), and (e) to ensure that 

registered clearing agencies had 

sufficient time to replace any directors 

to meet requirements related to 

independence.369 In particular, the 

commenter explained that some 

directors serve terms longer than two 

years, and so a later compliance date 

could help ensure an orderly 

transition.370 An orderly transition of 

directors is important, but a later 

compliance date is unnecessary to 

achieve an orderly transition of 

directors, to the extent such transition is 

necessary. Even in a case where 

directors serve three-year terms, the 

implementation period need not 

accommodate the expiration of all terms 

of currently serving directors because 

the rules do not require the turnover of 

all directors. To the extent that a 

clearing agency determines that either 

its overall board composition or its 

current set of independent and nonindependent directors must change to 

achieve compliance with the final rules, 

24 months provides sufficient time to 

develop and apply new standards for 

independent directors in an orderly 

manner and, as a general matter, to 

conduct nominations, elections, and 

appointments of new directors within 

the clearing agency’s established 

processes for nominations, elections, 

and appointments. As an example, most 

clearing agencies would complete two 

cycles of annual nominations, elections, 

and appointments before the 

compliance date. Even for a clearing 

agency that has directors serving longer 

terms that are not staggered, the 

governance arrangements would still 

provide mechanisms to replace directors 

in an orderly manner. Such mechanisms 

include, for example, those that a 

clearing agency would use to fill a 

vacancy that occurs when a director 

vacates her position prior to the end of 

her term. In addition, even for a clearing 

agency that does not conduct annual 

elections of directors, it would still 

conduct an annual meeting of 

shareholders, at which off-calendar 

director elections could be scheduled as 

needed. In the Commission’s view, two 

years provides sufficient time to ensure 

an orderly transition of directors, to the 

extent a registered clearing agency 

determines that its current board 

composition should change to meet the 

requirements in Rule 17Ad–255 for 

independent directors. 

Second, one commenter 

recommended more generally that the 

Commission consider a later compliance 

date because, in the commenter’s view, 

the proposed rules are more 

burdensome than described by the 

Commission as proposed.371 For the 

reasons discussed in Part II above, and 

particularly in Part II.E, the proposed 

rules are not more burdensome than 

originally described, and in the final 

rules the Commission has modified the 

text of the rules to ensure that the 

obligations under the rule are clear and 

consistent with the discussion in the 

Governance Proposing Release. 

Nevertheless, to ensure that registered 

clearing agencies have time to consider 

and develop changes to rules, policies, 

and procedures to ensure compliance 

with Rule 17Ad–255, and to submit 

those changes to the Commission for 

review when required by section 19 of 

the Exchange Act and Rule 19b-4, the 

Commission is adopting a compliance 

date of 12 months after publication in 

the Federal Register for Rule 17Ad–255, 

except that the compliance date for 

Rules 17Ad–255(b)(1), (c)(2), and (e) is 

24 months after publication in the 

Federal Register. 

IV. Economic Analysis 

A. Introduction 

The Commission is sensitive to the 

economic consequences and effects of 

the final rules, including their benefits 

and costs.372 The Commission 

acknowledges that, since many of these 

rules could require a registered clearing 

agency to adopt new policies and 

procedures, the economic effects and 

consequences of these rules include 

those flowing from the substantive 

results of those new policies and 

procedures. Further, as stated above, 

Exchange Act section 17A directs the 

Commission to have due regard for the 

public interest, the protection of 

investors, the safeguarding of securities 

and funds, and maintenance of fair 

competition among brokers and dealers, 

clearing agencies, and transfer agents 

when using its authority to facilitate the 

establishment of a national system for 

clearance and settlement of transactions 

in securities.373

This economic analysis addresses the 

likely economic effects of the final rules, 

including their anticipated and 

estimated benefits and costs and their 

likely effects on efficiency, competition, 

and capital formation. Many of the 

benefits and costs are difficult to 

quantify. For example, the issue of 

divergent incentives is a core economic 

matter that is persistent across many 

different types of economic interactions 

among registered clearing agency 

stakeholders. Incentives affect the 

economic outcome of a transaction, but 

there is no reliable or comparable data 

across different organizations about how 

decision-making processes directly 

affect monetary gains and losses. In 

addition, quantification of these 

incentive effects is particularly 

challenging due to the number of 

assumptions that would be needed to 

forecast how registered clearing 

agencies will respond to the final rules, 

and how those responses will, in turn, 

affect the broader market for cleared 

securities. While the Commission has 

attempted to quantify economic effects 

where possible, much of the discussion 

of economic effects is qualitative in 

nature. However, the inability to 

quantify benefits and costs does not 

mean that the benefits and costs of the 

final rules are any less significant. The 

Commission sought comment on all 

aspects of the economic analysis, 

especially any data or information that 

would enable a quantification of 

economic effects, and the analysis 

below takes into consideration relevant 

comments received. The Commission 

also discusses the potential economic 

effects of certain alternatives to the final 

rules. 


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374Neither BSECC nor SCCP has provided 

clearing services in over a decade. See Exchange 

Act Release No. 63629 (Jan. 3, 2011) (BSECC 

‘‘returned all clearing funds to its members by 

September 30, 2010, and [ ] no longer maintains 

clearing members or has any other clearing 

operations as of that date. [ ] BSECC [ ] maintain[s] 

its registration as a clearing agency with the 

Commission for possible active operations in the 

future.’’); Exchange Act Release No. 63268 (Nov. 8, 

2010) (‘‘SCCP returned all clearing fund deposits by 

September 30, 2009; [and] as of that date SCCP no 

longer maintains clearing members or has any other 

clearing operations. [ ] SCCP [ ] maintain[s] its 

registration as a clearing agency for possible active 

operations in the future.’’). Because they do not 

provide clearing services, BSECC and SCCP are not 

included in the economic baseline or the 

consideration of benefits and costs. They are 

included in the PRA for purposes of the PRA 

estimate, see infra at Part V. 

375For example, DTC, NSCC, and FICC are 

subsidiaries of DTCC. Participants of DTC, FICC, 

and NSCC that make full use of the services of one 

or more of these clearing agency subsidiaries of 

DTCC are required to purchase DTCC common 

shares. See, e.g., Exchange Act Release No. 52922 

(Dec. 7, 2005), 70 FR 74070 (Dec. 14, 2005). 

376For example, OCC is owned by certain options 

exchanges; ICC is a subsidiary of ICE, which is 

listed on the New York Stock Exchange; and LCH 

SA is a subsidiary of LCH Group Holdings, Ltd., 

which is majority-owned by London Stock 

Exchange Group plc (a publicly traded company). 

377See DTCC at 4 (‘‘it is true as the Proposing 

Release suggests that concentration of clearing and 

settlement services has occurred over time’’). 

378See Governance Proposing Release. supra note 

2, at 51813. 

B. Economic Baseline 

To consider the effect of the final 

rules, the Commission first explains the 

current state of affairs in the market (i.e., 

the economic baseline). All the benefits 

and costs from adopting the final rules 

are changes relative to the economic 

baseline. The economic baseline in this 

release considers: (1) the current market 

for registered clearing agency activities, 

including the number of registered 

clearing agencies, the distribution of 

participants across these clearing 

agencies, and the scope of trading 

activity these clearing agencies process, 

(2) the current regulatory framework for 

registered clearing agencies, and (3) the 

current practices of registered clearing 

agencies that relate to the final rules. 

1. Description of Market 

Clearing agencies are financial 

markets infrastructures, which include 

central securities depositories and 

central counterparties, and each clearing 

agency plays an important role in the 

financial system. In the United States, 

there are currently six active registered 

clearing agencies (NSCC, DTC, FICC, 

ICC, LCH SA, and OCC), and two 

registered clearing agencies that are 

inactive (BSECC and SCCP).374

DTC provides central securities 

depository (CSD) services; the other five 

active registered clearing agencies 

provide central clearing counterparty 

(CCP) services. NSCC offers clearance 

services for equities, corporate and 

municipal bonds, derivatives, money 

market instruments, syndicated loans, 

mutual funds, and alternative 

investment products in the United 

States. FICC provides clearance services 

for government and mortgage-backed 

securities. ICC and LCH SA are both 

registered clearing agencies for credit 

default swaps (‘‘CDS’’). OCC offers 

clearing services for exchange-traded 

U.S. equity options. 

Registered clearing agencies broadly 

operate under two organizational 

models. Specifically, the registered 

clearing agency may be organized so 

that the participants are owners of the 

clearing agency,375 or so that 

participants are not owners of the 

clearing agency.376

Registered clearing agencies currently 

operate specialized clearing services 

and face limited competition in their 

markets. For example, there is only one 

registered clearing agency serving as a 

central counterparty for each of the 

following asset classes: exchange-traded 

equity options (OCC), government 

securities (FICC), mortgage-backed 

securities (FICC), and equity securities 

(NSCC). There is also only one 

registered clearing agency providing 

central securities depository services 

(DTC). Registered clearing agencies’ 

participants include securities brokers 

and dealers, custodian and clearing 

banks, and certain other investment 

institutions. Table 1 summarizes the 

most recent data on the number of 

participants at each registered clearing 

agency. 

Registered clearing agency activities 

exhibit high barriers to entry and 

economies of scale. These features of the 

existing market, and the resulting 

concentration of clearing and settlement 

services within a handful of entities,377

informs the Commission’s examination 

of the effects of the final rules on 

competition, efficiency, and capital 

formation, as discussed below. 

TABLE 1—ACTIVE REGISTERED CLEARING AGENCIES AND NUMBER OF PARTICIPANTS

Registered clearing agency Abbreviated 

name Function Number of participants a

Subsidiaries of The Depository Trust & Clearing Corporation (DTCC): 

—National Securities Clearing Corporation b ....................................................................... NSCC ........... CCP ............... 4,090 

—The Depository Trust Company c ..................................................................................... DTC .............. CSD ............... 860 

—Fixed Income Clearing Corporation (Government Securities Division) d ......................... FICC ............. CCP ............... 214 

—Fixed Income Clearing Corporation (Mortgage Backed Securities Division) e ................ FICC ............. CCP ............... 139 

Subsidiaries of Intercontinental Exchange (ICE): 

—ICE Clear Credit f ............................................................................................................. ICC ............... CCP ............... 30 

Subsidiaries of LCH Group Holdings Ltd (LCH): 

—LCH SA (CDS Clear Participants Only) g ......................................................................... LCH SA ........ CCP ............... 25 

The Options Clearing Corporation h ............................................................................................ OCC ............. CCP ............... 187 

aParticipant statistics were taken from the websites of each of the listed clearing agencies in July 2023. 

b NSCC Member Directories, available at http://www.dtcc.com/client-center/nscc-directories. 

c DTC Member Directories, available at http://www.dtcc.com/client-center/dtc-directories. 

d FICC-GOV Member Directories, available at http://www.dtcc.com/client-center/ficc-gov-directories. eFICC-MBS Member Directories, available at http://www.dtcc.com/client-center/ficc-mbs-directories. 

f ICE Clear Credit Participants, available at https://www.theice.com/client-center/clear-credit/participants. 

g LCH SA Membership, available at https://www.lch.com/membership/member-search. 

h Member Directory, available at http://www.theocc.com/Company-Information/Member-Directory. 

Registered clearing agencies in the 

U.S. are an essential part of the 

infrastructure of the U.S. securities 

markets due to their role as 

intermediaries for clearing and settling 

securities transactions.378 In the 12- 

month period from October 2021 to 

September 2022, approximately $1,270 

billion (65 percent) of the notional 


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379 Data from DTCC’s Trade Information 

Warehouse, compiled by Commission staff. 

380See OCC, Annual Report (2022), available at 

https://annualreport.theocc.com; DTCC, Annual 

Report (2022), available at https://www.dtcc.com/ 

about/annual-report. Within DTCC, NSCC cleared 

$2.1 trillion of equity trades every day on average, 

FICC cleared a total of $1,512 trillion of government 

securities transactions and $61 trillion of agency 

mortgage-backed securities transactions, and DTC 

settled a total of $462 trillion of securities. 

381See Darrell Duffie, Still the World’s Safe 

Haven? Redesigning the U.S. Treasury Market After 

the COVID–19 Crisis, Hutchins Center Working 

Paper No. 62 (June 2020), at 15, available at https:// 

www.brookings.edu/wp-content/uploads/2020/05/ 

wp62_duffie_v2.pdf (‘‘Central clearing increases the 

transparency of settlement risk to regulators and 

market participants, and in particular allows the 

CCP to identify concentrated positions and crowded 

trades, adjusting margin requirements accordingly. 

Central clearing also improves market safety by 

lowering exposure to settlement failures. . . . As 

depicted, settlement failures rose less in March 

[2020] for [U.S. Treasury] trades that were centrally 

cleared by FICC than for all trades involving 

primary dealers. A possible explanation is that 

central clearing reduces ‘daisy-chain’ failures, 

which occur when firm A fails to deliver a security 

to firm B, causing firm B to fail to firm C, and so 

on.’’). 

382See generally Albert J. Menkveld & Guillaume 

Vuillemey, The Economics of Central Clearing, 13 

Ann. Rev. Fin. Econ. 153 (2021). 

383See generally Dietrich Domanski, Leonardo 

Gambacorta & Cristina Picillo, Central Clearing: 

Trends and Current Issues, BIS Q. Rev. (Dec. 2015), 

available at https://www.bis.org/publ/qtrpdf/r_

qt1512g.pdf (describing links between CCP 

financial risk management and systemic risk); 

Darrell Duffie, Ada Li & Theo Lubke, Policy 

Perspectives on OTC Derivatives Market 

Infrastructure, Fed. Res. Bank N.Y. Staff Rep. No. 

424, at 9 (Mar. 2010), available at http://

www.newyorkfed.org/research/staff_reports/ 

sr424.pdf (‘‘If a CCP is successful in clearing a large 

quantity of derivatives trades, the CCP is itself a 

systemically important financial institution. The 

failure of a CCP could suddenly expose many major 

market participants to losses. Any such failure, 

moreover, is likely to have been triggered by the 

failure of one or more large clearing agency 

participants, and therefore to occur during a period 

of extreme market fragility.’’); Craig Pirrong, The 

Inefficiency of Clearing Mandates, Policy Analysis 

No. 655, at 11–14, 16–17, 24–26 (July 2010), 

available at http://www.cato.org/pubs/pas/ 

PA665.pdf (stating, among other things, that ‘‘CCPs 

are concentrated points of potential failure that can 

create their own systemic risks,’’ that ‘‘[a]t most, 

creation of CCPs changes the topology of the 

network of connections among firms, but it does not 

eliminate these connections,’’ that clearing may 

lead speculators and hedgers to take larger 

positions, that a CCP’s failure to effectively price 

counterparty risks may lead to moral hazard and 

adverse selection problems, that the main effect of 

clearing would be to ‘‘redistribute losses 

consequent to a bankruptcy or run,’’ and that 

clearing entities have failed or come under stress in 

the past, including in connection with the 1987 

market break); Glenn Hubbard et al., Report of the 

Task Force on Financial Stability, Brookings 

Institution (June 2021), available athttps://

www.brookings.edu/wp-content/uploads/2021/06/ 

financial-stability_report.pdf, at 96 (‘‘In short, the 

systemic consequences from a failure of a major 

CCP, or worse, multiple CCPs, would be severe. 

Pervasive reforms of derivatives markets following 

2008 are, in effect, unfinished business; the 

systemic risk of CCPs has been exacerbated and left 

unaddressed.’’); Froukelien Wendt, Central 

Counterparties: Addressing their Too Important to 

Fail Nature, IMF Working Paper No. 15/21 (Jan. 

2015), available at http://papers.ssrn.com/sol3/ 

Delivery.cfm/wp1521.pdf (assessing the potential 

channels for contagion arising from CCP 

interconnectedness); Manmohan Singh, Making 

OTC Derivatives Safe—A Fresh Look, IMF Working 

Paper No. 11/66 (Mar. 2011), at 5–11, available at 

http://www.imf.org/external/pubs/ft/wp/2011/ 

wp1166.pdf (addressing factors that could lead 

central counterparties to be ‘‘risk nodes’’ that may 

threaten systemic disruption). 

384See Paolo Saguato, Financial Regulation, 

Corporate Governance, and the Hidden Costs of 

Clearinghouses, 82 Ohio St. L.J. 1071, 1074–75 

(2022), available at https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=3269060 (‘‘[T]he decision 

to centralize risk in clearinghouses made them 

critical for the stability of the financial system, to 

the point that they are considered not only too-bigto-fail, but also too-important-to-fail institutions.’’). 

385 Governance Proposing Release, supra note 2, 

at various places in Parts I, II, and III (51813– 

51839). 

386Currently, ICC, LCH SA, and OCC are 

regulated by the CFTC. DTC, FICC, NSCC, ICC, and 

OCC have been designated systemically important 

financial market utilities. DTC is also a state 

member bank of the Federal Reserve System. 

387See LCH, Company Structure, available at 

https://www.lch.com/about-us/structure-andgovernance/company-structure. 

388See Committee on Payment and Settlement 

Systems and Technical Committee of the 

International Organization of Securities 

Commissions, PFMI (Apr. 16, 2012), available 

athttp://www.bis.org/publ/cpss101a.pdf. 

389CCA Standards Adopting Release, supra note 

4, at 70789, 70796–97. A CPMI–IOSCO assessment 

report also has assessed that the Commission’s rules 

are consistent with the PFMI principles. See CPMI– 

IOSCO, Implementation monitoring of PFMI: 

Assessment report for the United States—Payment 

systems, central securities depositories and 

securities settlement systems (May 31, 2019), at 2, 

available at https://www.bis.org/cpmi/publ/ 

d184.pdf (presenting the conclusions drawn by the 

CPMI and IOSCO from a Level 2 assessment). 

390For example, the OCC is a Delaware 

corporation. See OCC, Certificate of Incorporation, 

available at https://www.theocc.com/CompanyInformation/Documents-and-Archives/OCCCertificate-of-Incorporation. 

391PFMI is an international standard, and as such 

does not have the force of law. 

amount of all single-name CDS 

transactions in the United States were 

centrally cleared.379 In 2022, DTCC 

processed $2.5 quadrillion in securities 

transactions, and OCC cleared 10.38 

billion individual options contracts.380

Central clearing generally benefits the 

markets in which it is available through 

significantly reducing participants’ 

counterparty risk and through more 

efficient netting of margin. 

Consequently, central clearing also 

benefits the financial system as a whole 

by increasing financial resilience and 

the ability to monitor and manage 

risk.381 Notwithstanding the benefits, 

central clearing concentrates risk in the 

registered clearing agency.382 Disruption 

to a registered clearing agency’s 

operations, or failure on the part of a 

registered clearing agency to meet its 

obligations, could serve as a source of 

contagion across U.S. securities markets, 

resulting in significant costs not only to 

the registered clearing agency itself or 

its participants but also to other market 

participants and the broader U.S. 

financial system.383 As a result, proper 

management of the risks associated with 

central clearing helps ensure the 

stability of the U.S. securities markets 

and the broader U.S. financial 

system.384

2. Overview of the Existing Regulatory 

Framework 

The existing regulatory framework for 

clearing agencies registered with the 

Commission includes Exchange Act 

section 17A and the Dodd-Frank Act, 

and the related rules adopted by the 

Commission. The current regulatory 

system is discussed in the Governance 

Proposing Release.385

The Commission is aware that 

clearing agencies registered with the 

Commission may also be subject to 

other domestic or foreign regulators. 

Specifically, registered clearing agencies 

operating in the United States may also 

be subject to regulation by the CFTC (as 

derivatives clearing organizations for 

futures or swaps) and the Board of 

Governors of the Federal Reserve 

System (as systemically important 

financial market utilities or state 

member banks).386 In addition, clearing 

agencies registered with the 

Commission may be subject to foreign 

clearing agency regulators. For example, 

LCH SA is subject to EMIR and is 

regulated by l’Autorite ́ des marche ́s 

financiers, l’Autorite ́ de Controˆle 

Prudentiel et de Re ́solution, and the 

Banque de France.387

The Commission also considers 

relevant international standards when 

engaging in rulemaking for registered 

clearing agencies. For example, in 2012, 

CPMI and IOSCO issued the PFMI, a set 

of international standards for financial 

market infrastructures.388 In connection 

with rulemaking required by section 

805(a)(2)(A) of the Clearing Supervision 

Act, 12 U.S.C. 5464(a)(2)(A), the 

Commission considered the principles 

and responsibilities in the PFMI when 

adopting Rule 17Ad–22(e).389 Further, 

registered clearing agencies must follow 

state laws applicable to their choice of 

business structure, such as limited 

liability companies, corporations, or 

trusts.390 Table 2 summarizes the board 

composition and independent director 

requirements of the CFTC, the Board of 

Governors of the Federal Reserve 

System, and EMIR, as well as the related 

principle in the PFMI.391


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392Cf. Bank of England, The Bank of England’s 

supervision of financial market infrastructures— 

Annual Report (Mar. 2015), at Chapter 2.1.4 

(‘‘Strong user and independent representation in 

[UK CCPs] governance structures should help 

ensure that UK CCPs focus not only on the 

management of microprudential risks to themselves 

but also on systemic risks.’’). 

393See Sean Griffith, Governing Systemic Risk: 

Towards a Governance Structure for Derivatives 

Clearinghouses, 61 Emory L. J. 1153, 1197 (2012), 

available at https://scholarlycommons.law.

emory.edu/elj/vol61/iss5/3, at 1210 (‘‘[T]he 

containment of systemic risk [is] a public good. . . . 

Because no private party can enjoy the full benefit 

of eliminating systemic risk, no private party has an 

incentive to fully internalize the cost of doing so. 

As a result, no private party can simply be 

entrusted with the means of doing so because it is 

more likely to use those means to some other ends. 

. . . In other words, none of the commercial parties 

has the right incentives.’’). 

394Cf. Treasury Market Practices Group (TMPG), 

Best Practice Guidance on Clearing and Settlement, 

at 3 (July 2019), available at https://www.newyork

fed.org/medialibrary/Microsites/tmpg/files/CS_

BestPractices_071119.pdf (in commenting on the 

‘‘potential role for expanded central clearing’’ in the 

secondary U.S. Treasuries market, the TMPG stated 

that ‘‘changes to market structure that have 

occurred have also resulted in a substantial 

increase, in both absolute and percentage terms, in 

the number of trades that clear bilaterally rather 

than through a central counterparty. This 

principally stems from the increased prevalence of 

P[rincipal] T[rading] F[irm] activity on 

I[nter]D[ealer ]B[roker] platforms.’’). 

395See Griffith, supra note 393, at 1197 

(‘‘[D]ealers have a clear incentive to protect the 

profits they receive from the bilateral market. . .by 

keeping trades off of clearinghouses. Keeping trades 

off of clearinghouses has obvious systemic risk 

implications: a clearinghouse cannot contain the 

risk of trades that it does not clear.’’). Though bilateral clearing serves a well-defined function in 

eliminating basis risk and allowing for more precise 

hedging, its benefits in terms of systemic risk 

mitigation are more limited relative to centralized 

clearing. 396See Griffith, supra note 393, at 1200. 397See PFMI, supra note 388, at 11. 398Cf. id. at 128 (Noting that regulators have a 

role in addressing negative externalities. 

‘‘[R]egulation, supervision, and oversight of an FMI 

are needed to . . . address negative externalities 

that can be associated with the FMI, and to foster 

financial stability generally.’’); Menkveld & 

Vuillemey, supra note 382, at 22 (‘‘Network 

externalities create a role for regulators to 

coordinate investors on a socially desirable 

equilibrium.’’). 

TABLE 2—BOARD COMPOSITION AND INDEPENDENT DIRECTOR REQUIREMENTS OF CFTC, BOARD OF GOVERNORS, EMIR, 

AND CPMI–IOSCO (PFMI) 

Organization Board composition and independence requirements 

CFTC ............................................... ‘‘A derivatives clearing organization shall ensure that the composition of the governing board or board-level 

committee of the derivatives clearing organization includes market participants and individuals who are 

not executives, officers, or employees of the derivatives clearing organization or an affiliate thereof.’’ (17 

CFR 39.26). 

Board of Governors of the Federal 

Reserve System.

‘‘. . . the designated financial market utility has governance arrangements that are designed to ensure 

. . . [t]he board of directors includes a majority of individuals who are not executives, officers, or employees of the designated financial market utility or an affiliate of the designated financial market utility’’ 

(12 CFR 234.3(a)(2)(iv)(D)).a

European Market Infrastructure 

Regulation (EMIR).

‘‘A CCP shall have a board. At least one third, but no less than two, of the members of that board shall be 

independent. Representatives of the clients of clearing members shall be invited to board meetings for 

matters relevant to Articles 38 and 39. The compensation of the independent and other non- executive 

members of the board shall not be linked to the business performance of the CCP’’ (Regulation (EU) No 

648/2012 of the European Parliament and of the Council of 4 July 2012, Title IV, Article 27). 

‘‘ ‘[I]ndependent member’ of the board means a member of the board who has no business, family or other 

relationship that raises a conflict of interests regarding the CCP concerned or its controlling shareholders, its management or its clearing members, and who has had no such relationship during the five 

years preceding his membership of the board’’ (Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012, Title I, Article 2(28)). 

CPMI–IOSCO .................................. ‘‘[Board] members should be able to exercise objective and independent judgment. Independence from the 

views of management typically requires the inclusion of non-executive board members, including independent board members, as appropriate. Definitions of an independent board member vary and often 

are determined by local laws and regulations, but the key characteristic of independence is the ability to 

exercise objective, independent judgment after fair consideration of all relevant information and views 

and without undue influence from executives or from inappropriate external parties or interests. The precise definition of independence used by an F[inancial] M[arket] I[nfrastructure (FMI)] should be specified 

and publicly disclosed, and should exclude parties with significant business relationships with the FMI, 

cross-directorships, or controlling shareholdings, as well as employees of the organisation’’ (PFMI, 

§ 3.2.10, footnotes omitted). 

a ‘‘The risk management standards [12 CFR 234] do not apply, however, to . . . a clearing agency registered with the Securities and Exchange Commission . . .’’ (12 CFR 234.1(b)). 

3. Divergent Incentives of Registered 

Clearing Agency Stakeholders 

Registered clearing agency 

stakeholders, such as owners and direct 

and indirect participants, have 

incentives that may not be in alignment 

with the interests of the broader 

financial markets.392 Any such 

misalignment, if left unmitigated, could 

limit the benefits of central clearing and 

hinder the resilience of other financial 

market intermediaries and the broader 

financial market.393 For example, in 

securities markets where all or part of a 

transaction may not be subject to a 

central clearing requirement, a single 

participant or a small group of 

participants may have a profit incentive 

to select bilateral clearing over central 

clearing 394 or seek to influence a 

registered clearing agency to not clear a 

security that would profit the 

participants more if the security were 

cleared bilaterally. Not only could such 

incentives limit the benefits of central 

clearing, but they could also reduce 

resilience in the broader financial 

market by increasing overall 

counterparty risk.395 In addition, 

indirect participants that are not 

permitted to directly access clearing 

services have incentives to ‘‘avoid 

clearing and seek higher-margin trading 

activity through faux customization.’’ 396

This, too, could hinder resilience in the 

broader financial market by increasing 

overall counterparty risk. Lastly, as 

pointed out in a BIS and IOSCO report, 

‘‘. . . an FMI and its participants may 

generate significant negative 

externalities for the entire financial 

system and real economy if they do not 

adequately manage their risks.’’ 397 To 

the extent these negative externalities 

are not adequately internalized by the 

registered clearing agency or otherwise 

mitigated, they could present systemic 

risks to the broader financial markets.398

Multiple commenters agreed that the 

incentives of registered clearing 


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399See, e.g., comments by Ian Marshall (Aug. 17, 

2022) (‘‘. . . very rarely do individuals operate 

outside their own interests which in the case of 

powerful far reaching institutions such as clearing 

agencies, produces the potential to risk the well 

being of members, affiliated parties, and market 

stability. . . ’’); Chris Barnard (Sept. 9, 2022) (‘‘. . . 

conflicts of interest inherent in clearing agency 

relationships could substantially harm the securitybased swaps or wider financial market.’’). 

400See Saguato, supra note 384, at 5, 13 (stating 

that ‘‘effective risk management in financial 

institutions can be achieved only if the final risk 

bearers have a voice in the governance of the firm’’ 

and that ‘‘the existing regulatory framework 

underestimates and does not address the misaligned 

incentives that spill from the agency costs of the 

separation of risk and control and from the membershareholder divide . . .’’); Hester Peirce, 

Derivatives Clearinghouses: Clearing the Way to 

Failure, 64 Clev. St. L. Rev. 589 (2016), available 

at https://engagedscholarship.csuohio.edu/cgi/ 

viewcontent.cgi?article=3915&context=clevstlrev 

(arguing that clearing members must play a central 

role in risk management); Craig Pirrong, The 

Economics of Central Clearing: Theory and Practice, 

ISDA Discussion Papers Series No. 1 (May 2011), 

at 3, available at https://www.isda.org/a/yiEDE/ 

isdadiscussion-ccp-pirrong.pdf (‘‘CCPs should be 

organized so as to align the control of risks with 

those who bear the consequences of risk 

management decisions.’’). 

401See Menkveld & Vuillemey, supra note 382, at 

21 (‘‘While the literature on central clearing has 

made significant progress over the past ten years, 

a number of important questions remain open. On 

the theoretical front, there is still no standard model 

of . . . [CCP] governance.’’). 

402SEC Division of Trading and Markets and 

Office of Compliance Inspections and 

Examinations, Staff Report on the Regulation of 

Clearing Agencies (Oct. 1, 2020) (‘‘Staff Report on 

Clearing Agencies’’), available athttps://

www.sec.gov/files/regulation-clearing-agencies100120.pdf, at 25. 

403For example, OCC, ICC, and LCH SA are not 

owned by participants. 

404See Saguato, supra note 384, at 1099 (‘‘This 

new agency conflict that stems from the separation 

of risk and control and from the ‘membershareholder divide’ misaligns the incentives of the 

clearinghouse from those of its members . . .’’). 

This specific agency conflict is less of a concern in 

cases where clearing agency participants own 

shares of the clearing agency, because there is less 

separation of risk and control. For example, DTC, 

NSCC, and FICC operate under a utility model, 

where the participants own shares of the parent 

company, DTCC. 

405See Menkveld & Vuillemey, supra note 382, at 

20 (noting that because participants are a ‘‘captive 

clientele,’’ clearing agencies could be incentivized 

to relax risk management standards); Saguato, supra 

note 384, at 1099, 1102. However, it is possible that 

a captive clientele could also incentivize a clearing 

agency to increase its risk management standards if 

there is participant representation in the 

governance structure. 

406See Saguato at 2. 

407See Kristin N. Johnson, Commentary on the 

Abraham L. Pomerantz Lecture: Clearinghouse 

Governance: Moving Beyond Cosmetic Reform, 77 

Brook. L. Rev. 2, 698 (2012), available at https://

brooklynworks.brooklaw.edu/blr/vol77/iss2/5 

(‘‘Large dealers have incentives to limit smaller 

dealers’ access to clearinghouse membership. When 

large dealers act as brokers for the smaller 

nonmember dealers, the larger dealers earn 

revenues for executing transactions for dealers who 

are nonmembers and ineligible for membership. If 

eligibility standards preclude smaller dealers from 

gaining the full benefits of membership, then small 

dealers who desire to execute transactions must 

seek the assistance of the larger dealers who are 

members. Thus, large dealers have commercial 

incentives to ensure that smaller dealers remain 

ineligible for membership.’’); Griffith, supra note 

393, at 1197 (‘‘The major dealers may also use their 

influence over clearinghouses to protect [their] 

trading profits, using the clearinghouse as a means 

of increasing their market share and excluding 

competitors.’’). Multiple commenters agreed that 

large participants stand to gain from anticompetitive conduct against smaller participants 

(See Better Markets at 9–10; IDTA at 3). 

408See 17 CFR 240.17Ad–22(b)(5) through (b)(7), 

and (e)(18). 

agencies and their stakeholders can 

diverge from the interest of the broader 

financial markets.399

Several researchers have commented 

that the misalignment of interests 

between registered clearing agency 

stakeholders (owners and non-owner 

participants, for example) weakens the 

effectiveness of registered clearing 

agencies’ risk management under the 

existing regulatory framework.400 Less 

effective risk management, in turn, 

hinders the resilience of individual 

registered clearing agencies, the clearing 

services market, and the broader 

financial markets, as well as 

competition among participants. 

However, academic literature has not 

coalesced around a standard model 

describing clearing agency governance, 

leaving some uncertainty about the 

theoretical best way to mitigate 

divergent incentives.401

As discussed more fully below, the 

Commission is aware of divergent 

incentives at some registered clearing 

agencies between clearing agency 

owners and non-owner participants, and 

the importance of actively addressing 

these divergent incentives through 

proactive measures to achieve sound 

governance and resilience. In the 2020 

Staff Report on the Regulation of 

Clearing Agencies, Commission staff 

emphasized that ‘‘robust written rules, 

policies, and procedures are important 

to clearing agency functioning, but 

represent only the first step in achieving 

resilience and compliance. To achieve 

real-life outcomes that help promote 

resilience and compliance, rules, 

policies, and procedures must be . . . 

subject to sound governance that 

ensures they will be executed promptly 

and effectively.’’ 402

(a) Divergent Incentives of Owners and 

Non-Owner Participants 

Because registered clearing agencies 

mutualize risk among participants but 

not all participants necessarily hold an 

equity interest in the registered clearing 

agencies,403 the incentives of clearing 

agency owners can differ from the 

incentives of clearing agency 

participants.404 For example, owners 

have an incentive to transfer as much 

risk of loss as possible to non-owner 

participants or to lower risk 

management standards.405 In such 

cases, the owners benefit by receiving 

higher profits or tying up less capital in 

their investment while participants are 

left with greater potential losses in the 

event of a counterparty default or nondefault loss and potentially higher 

margin and default fund requirements. 

One commenter encouraged the 

Commission to further study ‘‘how 

different clearing agencies ownership 

models and organizational arrangements 

allocate incentives among owners and 

participants’’ and to go further in 

aligning the interests of owners and 

non-owner participants.406 This 

adopting release incorporates a 

comprehensive review of academic, 

business, and regulatory studies on 

clearing agency ownership models and 

organizational arrangements. The 

Commission evaluated certain clearing 

agency ownership alternatives in the 

Part IV.D. The Commission will 

continue to monitor the incentives of 

registered clearing agency owners and 

participants and their effects on the 

agencies’ decision-making processes. 

(b) Divergent Incentives Among 

Participants 

In addition, different types of 

participants (direct versus indirect 

participants or large versus small 

participants, for example) have 

divergent incentives. For example, large 

direct participants have incentives to 

influence the registered clearing agency 

to adopt policies that would exclude 

smaller dealers from participating 

directly in the registered clearing 

agency.407 Because there is only one 

registered clearing agency serving as a 

central counterparty for some asset 

classes, such policies could negatively 

affect competition among registered 

clearing agency participants. The 

diverging incentives of large direct 

participants compared to smaller 

indirect participants are mitigated by 

Rule 17Ad–22, which in part requires a 

registered clearing agency to admit 

participants who meet minimum 

standards.408

Large participants also have 

incentives to influence the registered 

clearing agency to adopt policies that 

could disproportionately allocate a risk 

of loss to smaller participants, such as 

by allowing the large participant to 

contribute lower quality collateral to 

satisfy margin or default fund 

requirements or by promoting margin 

requirements that are not commensurate 

with the risks and particular attributes 


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409See 17 CFR 240.17Ad–22(e)(5) and (e)(6). One 

commenter disagreed that Rule 17Ad–22 has 

‘‘solved the problem of market dominance’’ (Better 

Markets, at 16). The Commission agrees with the 

commenter that although Rule 17Ad–22 mitigated 

the problem of market dominance, it did not 

eliminate the problem. 

410 15 U.S.C. 78q–1(b)(3)(C). 

411LCH’s requirement for the board of director is 

to have between 3 to 18 members. The board 

composition rules state that ‘‘at least two of the 

Independent Directors shall . . .’’, suggesting that 

there must be at least 2 independent directors, 

which represents 11% of an 18-member board. 

412OCC’s requirement for the board of directors 

is to have 20 members, 5 of whom (25%) should 

be ‘‘public directors.’’ 

413 ICC’s requirement for the board of directors is 

to have 9 members, 5 of whom (55.6%) must be 

independent. 

of each participant’s specific products, 

portfolio, and market. The diverging 

incentives of large participants 

compared to smaller direct participants 

are also mitigated by Rule 17Ad–22, 

which in part requires a registered 

clearing agency to establish minimum 

margin and liquidity requirements.409

By establishing minimum margin and 

liquidity requirements, Rule 17Ad–22 

reduces a large participant’s ability to 

obtain or maintain a competitive 

advantage through activities such as 

providing lower quality collateral or 

promoting margin requirements that are 

not commensurate with the risks and 

particular attributes of each 

participant’s specific products, 

portfolio, and market. 

4. Current Governance Practices 

Registered clearing agencies must 

operate in compliance with Rule 17Ad– 

22, though they may vary in the 

particular ways they achieve such 

compliance. Some variation in practices 

across registered clearing agencies 

derives from the products they clear and 

the markets they serve. 

An overview of current practices at 

the six operating registered clearing 

agencies is set forth below and includes 

discussion of registered clearing agency 

boards’ policies and procedures related 

to the composition of the board and 

board committees, conflicts of interests 

involving directors and senior 

managers, the obligations of the board 

regarding overseeing relationships with 

service providers for core services, and 

consideration of stakeholders’ views. 

This discussion is based on the 

Commission’s general understanding of 

current practices as of the date of this 

release and reflects the Commission’s 

experience supervising registered 

clearing agencies. 

(a) Current Practices Regarding Board 

Composition 

Each registered clearing agency has a 

board that governs its operations and 

supervises senior management. 

Exchange Act section 17A(b)(3)(C) 

prohibits a clearing agency from 

registering unless the Commission finds 

that ‘‘the rules of the clearing agency 

assure a fair representation of its 

shareholders (or members) and 

participants in the selection of its 

directors and administration of its 

affairs. (The Commission may determine 

that the representation of participants is 

fair if they are afforded a reasonable 

opportunity to acquire voting stock of 

the clearing agency, directly or 

indirectly, in reasonable proportion to 

their use of such clearing agency.).’’ 410

In addition, Rule 17Ad–252(e)(2) 

requires governance arrangements that 

support the objectives of owners and 

participants and consider the interests 

of other relevant stakeholders. 

(1) Independent Directors 

Registered clearing agencies currently 

use various definitions of independence 

and independent director. Some 

clearing agencies do not use the term 

independent to classify their board 

members; the closest equivalent to 

independent directors at these agencies 

is non-participant directors at the three 

DTCC agencies and public directors at 

OCC. In addition, current practices vary 

widely regarding the board and board 

committee requirements for 

independent directors (as the term is 

currently used by registered clearing 

agencies). For example, registered 

clearing agencies’ existing requirements 

for the minimum percentage of 

independent directors on the board 

ranges from 11 percent at LCH SA 411 to 

25 percent at OCC412 to 56 percent at 

ICC.413 The three DTCC clearing 

agencies require some non-participant 

directors, but do not specify a required 

minimum number or percentage. Table 

3 summarizes the general board 

composition and independent director 

requirements of each operating 

registered clearing agency. 

TABLE 3—BOARD COMPOSITION AND INDEPENDENT DIRECTOR REQUIREMENTS OF OPERATING REGISTERED CLEARING

AGENCIES

Clearing agency Board composition requirements Definition of independent director 

DTC, FICC, and 

NSCC (all use the 

same board as 

DTCC).

23 directors: 1 non-executive Chair, 1 DTCC executive 

(DTCC’s Pres. & CEO), 13 participant-owner directors, 6 

non-participant directors, 1 director designated by DTCC 

preferred stock shareholder ICE, 1 director designated 

by DTCC preferred stock shareholder FINRA. (See 

https://www.dtcc.com/about/leadership.).

A non-participant director is ‘‘an individual who is not an officer, employee, or member of the Board of Directors of 

a DTC participant or FICC/NSCC member, including 

Sponsored Members, but excluding Limited Members, as 

those terms are defined in the relevant Rulebooks.’’ (See 

DTCC Board of Directors Charter.a) 

OCC ......................... 20 directors: 1 management director (Chair), 5 public directors, 9 participant directors, 5 exchange directors. (See 

https://www.theocc.com/Company-Information/Board-ofDirectors; OCC Board Charter.b).

A public director ‘‘lacks material relationships to OCC, 

OCC’s Management Committee, and other directors’’ 

and is ‘‘not affiliated with any national securities exchange, national securities association, designated contract market, futures commission merchant, or broker or 

dealer in securities’’ (OCC Board Charter at 4, 6). ‘‘A 

substantial portion of directors shall be ‘independent’ of 

OCC and OCC’s management as defined by applicable 

regulatory requirements and the judgment of the Board’’ 

(OCC Board Charter at 5). 


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414See DTCC Governance Committee Charter 1 

(Feb. 2020), available at https://www.dtcc.com/-/ 

media/Files/Downloads/legal/policy-andcompliance/Governance-Committee-Charter.pdf 

(‘‘All members of the Committee shall be members 

of the Board who are not employed by DTCC (‘nonmanagement’ directors).’’); LCH SA Terms of 

Reference of the Nomination Committee of the 

Board of Directors (Sept. 9, 2020), available at 

https://www.lch.com/system/files/media_root/ 

LCH%20SA%20-%20NomCom%20ToRs.pdf 

(‘‘[The] membership shall comprise the Chairman, 

at least two Independent Directors, one User 

Director and the LSEG Director. The size of the 

Committee . . . for the current time, will comprise 

four to six directors.’’); OCC Governance and 

Nominating Committee Charter 1 (Sept. 22, 2021), 

available at https://www.theocc.com/getmedia/ 

483ac739-0d43-46d2-a1ca-7ed38094975c/ 

governance_nominating_charter.pdf (‘‘The 

Committee will be composed of at least one Public 

Director, one Exchange Director, and one Member 

Director. No Management Director will be a member 

of the Committee. [ ] The Committee Chair will be 

designated by the Board from among the Public 

Director Committee members.’’). 

415See supra Table 3 and accompanying text. 

416OCC Governance and Nominating Committee 

Charter, supra note 414, at 3. 

417 DTCC, Procedure for the Annual Nomination 

and Election of the Board of Directors (Feb. 11, 

2021), at 2, available at https://www.dtcc.com/-/ 

media/Files/Downloads/legal/policy-andcompliance/DTCC-BOD-Election-Procedure.pdf. 

418 ICC, ICE Clear Credit Regulation and 

Governance (Apr. 2022), at 2, available at https:// 

www.theice.com/publicdocs/clear_credit/ICE_

Clear_Credit_Regulation_and_Governance.pdf. 

TABLE 3—BOARD COMPOSITION AND INDEPENDENT DIRECTOR REQUIREMENTS OF OPERATING REGISTERED CLEARING

AGENCIES—Continued 

Clearing agency Board composition requirements Definition of independent director 

ICE Clear Credit ....... 9 directors (a/k/a Board of Managers): at least 5 independent directors and 2 management directors. 5 directors elected by ICE US Holding Company L.P. (3 of 5 

are independent and the remaining 2 are from ICE management). The Risk Committee designates four nominees (two must be independent and two may be nonindependent). (See ICC Regulation and Governance 

Fact Sheet c at 2.).

An independent director must satisfy the independence requirements in the NYSE Listed Company Manual.d An 

independent director also may not (among other things): 

• ‘‘have any material relationships with the Company and 

its subsidiaries.’’ 

• be affiliated with a Member Organization or, within the 

last year, (a) be employed by a Member Organization, 

(b) have an immediate family member who was an executive officer of a Member Organization, or (c) have received from any Member Organization more than 

$100,000 per year in direct compensation. (See ICC 

Independence Policy.e) 

LCH SA .................... 3 to 18 directors (currently 11 with 5 independent): ‘‘the 

board shall be composed of the following categories of 

Directors:’’ an independent Chair, independent directors, 

executive directors, a director proposed by Euronext, 

user directors, and a director representing London Stock 

Exchange Group plc. (See https://www.lch.com/about-us/ 

structure-and-governance/board-directors-0; LCH SA 

Terms of Reference of the Board f at 3.).

Independent director ‘‘means an independent director, who 

satisfies applicable Regulatory Requirements regarding 

independent directors and who is appointed in accordance with the Nomination Committee terms of reference’’ 

(LCH SA Terms of Reference of the Board at 2). 

a DTCC, Board of Directors Charter (June 2023), available at https://www.dtcc.com/∼/media/Files/Downloads/legal/policy-and-compliance/ 

DTCC-BOD-Mission-and-Charter.pdf. DTCC stated that ‘‘a definition [of what currently constitutes an independent director] may in fact be found 

under the definition of a ‘non-participant director’ ’’ DTCC at 4. bOCC, Board of Directors Charter and Corporate Governance Principles (May 26, 2022), available at https://www.theocc.com/getmedia/ 

99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf. c ICE, ICC Regulation and Governance Fact Sheet, available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_

and_Governance.pdf. dSee Section 303.A.02 of the NYSE Listed Company Manual, available at https://nyseguide.srorules.com/listed-company-manual (‘‘No director 

qualifies as ‘independent’ unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).’’ The independence requirements also list five situations that would preclude a director from being considered independent). e ICE, Independence Policy of the Board of Directors of Intercontinental Exchange, Inc., available athttps://s2.q4cdn.com/154085107/files/doc_

downloads/governance_docs/ICE-Independence-Policy.pdf. f LCH SA, Terms of Reference of the Board (Sept. 9, 2020), available at https://www.lch.com/system/files/media_root/LCH%20SA%

20Boards%20Terms%20of%20Reference.pdf. 

(2) Nominating Committee 

Five of the six operating registered 

clearing agency boards have a 

nominating committee or a committee 

that serves a similar function. Current 

practices regarding the minimum level 

of independent directors on the 

nominating committee vary widely. 

DTC, NSCC, and FICC require that the 

nominating committee be composed 

entirely of ‘‘non-management’’ directors; 

LCH SA requires that its nomination 

committee include an independent 

chair, at least two independent directors 

(as defined by LCH SA), and one user 

director; and OCC requires that the 

committee be chaired by a ‘‘public 

director’’ and include at least one 

exchange director and at least one 

member director.414 As stated 

previously, the definition of 

independent director varies across 

registered clearing agencies.415

All six registered clearing agency 

boards have fitness standards for 

directors, processes for evaluating 

directors, and processes for evaluating 

director independence. The fitness 

standards and processes for evaluating 

directors vary across registered clearing 

agencies. For example, OCC’s 

nominating committee is required to 

‘‘identify, screen and review individuals 

qualified to be elected or appointed [to 

the Board] after consultation with the 

Chairman,’’ 416 whereas DTCC’s 

governance committee, which serves as 

the nominating committee for DTC, 

NSCC, and FICC, is not required to 

consult with the chairman. Instead, 

DTCC’s governance committee 

‘‘considers possible nominations on its 

own initiative and invites suggestions 

from all participants of each of DTCC’s 

clearing and depository subsidiaries. [ ] 

The Governance Committee may also 

use a professional director search 

consultant to assist in identifying 

candidates for the non-participant Board 

positions.’’ 417 ICC, which does not have 

a nominating committee, uses its risk 

committee to nominate four directors. 

ICC’s direct parent company, ICE US 

Holding Company L.P., decides whether 

to elect the four nominees from the risk 

committee, and then appoints another 

five directors on their own.418


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419 DTC, NSC, FICC, OCC, and LCH SA. 

420OCC, ICC, and LCH SA each require that the 

risk committee include representatives from 

participants. Article 28 of EMIR requires that a 

clearing agency have a risk committee that includes 

representatives of its clearing members. See EMIR, 

supra note 56, at art. 28(1). 

421OCC, ICC, and LCH SA. 

422See 17 CFR 240.17Ad–22(d)(4) and (e)(17). 

423 In addition, DTC, as a state member bank of 

the Federal Reserve System, has received guidance 

from the Board of Governors of the Federal Reserve 

System regarding managing service provider risks. 

See SR Letter 13–19/CA Letter 13–21, Guidance on 

Managing Outsourcing Risk (Dec. 5, 2013, rev. Feb. 

26, 2021). The Board of Governors of the Federal 

Reserve System, jointly with the Federal Deposit 

Insurance Corporation and the Office of the 

Comptroller of the Currency, adopted updated 

guidance for banking organizations in 2023 

regarding the management of risks arising from 

third-party relationships. See 88 FR 37920 (June 9, 

2023). 

424See 17 CFR 242.1000 through 1007. 

425See Exchange Act Release No. 73639 (Nov. 19, 

2014), 79 FR 72251 (Dec. 5, 2014) (‘‘Regulation SCI 

Adopting Release’’), at 77276 (noting that ‘‘The 

Commission agrees with the comment that an SCI 

entity should be responsible for managing its 

relationship with third parties operating systems on 

behalf of the SCI entity through due diligence, 

contract terms, and monitoring of third party 

performance. [. . .] The Commission believes that 

it would be appropriate for an SCI entity to evaluate 

the challenges associated with oversight of thirdparty vendors that provide or support its applicable 

systems subject to Regulation SCI. If an SCI entity 

is uncertain of its ability to manage a third-party 

relationship (whether through due diligence, 

contract terms, monitoring, or other methods) to 

satisfy the requirements of Regulation SCI, then it 

would need to reassess its decision to outsource the 

applicable system to such third party.’’). 

426See 17 CFR 240.17Ad–22(e)(2)(vi). 

427See, e.g., CCP12, at 9; DTCC, at 12; LSEG, at 

15; OCC, at 14; OCC, Order Approving Proposed 

Rule Change, Exchange Act Release No. 88029 (Jan. 

24, 2020), 85 FR 5500, 5508 (Jan. 30, 2020) (‘‘OCC 

also describes the formal and informal mechanisms 

that OCC employs to solicit feedback from Clearing 

Members and other interested stakeholders, 

including its Financial Risk Advisory Committee, 

Operations Roundtable, multiple letters and open 

calls with Clearing Members and other interested 

stakeholders, and routine in-person meetings with 

trade groups and individual firms.’’); Cf. J.P. 

Morgan et al., A Path Forward for CCP Resilience, 

Recovery and Resolution (Mar. 10, 2020), available 

at https://www.jpmorgan.com/content/dam/jpm/ 

cib/complex/content/news/a-path-forward-for-ccpresilience-recovery-and-resolution/pdf-0.pdf 

(‘‘[C]learing participants have provided diverse 

perspectives and detailed feedback to CCPs and 

regulators through individual firm and industry 

association position papers, targeted comment 

letters, and participation in regulatory and industrysponsored forums on a global scale.’’). 

428See, e.g., CCP12 at 9; DTCC at 13; ICE at 6– 

7; OCC at 15. 

429See, e.g., J.P. Morgan et al., supra note 427, at 

1 (explaining that ‘‘[w]hile CCPs and the regulatory 

community have taken significant steps to address 

the feedback received, there remain outstanding 

issues that require additional attention’’ and 

recommending ‘‘[e]nhancing governance practices 

to obtain and address input from a broader array of 

market participants on relevant risk issues’’ to 

enhance CCP resilience). 

430CCP12 at 10. 

(3) Risk Management Committee 

Five of the six operating registered 

clearing agencies have RMCs of the 

board.419 The sixth registered clearing 

agency, ICC, has an RMC but has not 

identified it as a board committee. All 

six registered clearing agencies include 

representatives from clearing 

participants on the RMC, though only 

three registered clearing agencies 

require it.420 Three of the six operating 

registered clearing agencies require the 

membership of the RMC to be reevaluated annually.421

(b) Current Practices Regarding Conflicts 

of Interest Involving Directors or Senior 

Managers 

The boards of all six operating 

registered clearing agencies have 

policies and procedures in place to 

identify and mitigate conflicts of 

interest involving directors or senior 

managers. All six boards also require 

directors to notify the clearing agency if 

a conflict of interest arises. 

(c) Current Practices Regarding 

Management of Risks From 

Relationships With Service Providers 

for Core Services 

The Commission already requires 

registered clearing agencies to manage 

risks from operations,422 which can 

include risks associated with 

relationships with service providers.423

The Commission is aware that at least 

some registered clearing agencies 

periodically inform their boards 

regarding risk management associated 

with service providers for core services. 

The Commission also requires that 

SCI entities—including registered 

clearing agencies—conduct risk 

assessments of ‘‘SCI systems’’ at least 

once per year in accordance with 

Regulation SCI and report the findings 

to senior management and the board of 

directors.424 Insofar as service providers 

for core services are the providers of SCI 

systems, each registered clearing agency 

board likely already has written policies 

and procedures reasonably designed to, 

among other things, require senior 

management to: (1) evaluate and 

document the risks related to service 

provider relationships and whether the 

risks can be managed in a manner 

consistent with the registered clearing 

agency’s risk management framework, 

(2) establish policies and procedures 

that govern service provider 

relationships, (3) monitor service 

provider relationships on an ongoing 

basis for deterioration in performance, 

change in risks, or other material issues, 

and (4) report all new service provider 

relationships, related policies and 

procedures, and ongoing monitoring to 

the board of directors.425

(d) Current Practices Regarding Board 

Consideration of Stakeholder 

Viewpoints 

Currently, each covered clearing 

agency is required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide 

governance arrangements that consider 

the interests of participants’ customers, 

securities issuers and holders, and other 

relevant stakeholders of the covered 

clearing agency.426 The Commission 

understands that registered clearing 

agency boards currently use both formal 

and informal channels to solicit, 

receive, and consider the viewpoints of 

participants and other relevant 

stakeholders.427 Multiple commenters 

confirmed, for example, that registered 

clearing agencies are already required to 

solicit stakeholder viewpoints every 

time they propose a rule change as a 

self-regulatory organization (i.e., 

pursuant to Rule 19b–4) or an advance 

notice requirement as a SIFMU.428

Registered clearing agency participants 

acknowledge that their ability to offer 

viewpoints has yielded positive but 

mixed results.429

Regarding the proposed requirement 

that registered clearing agencies 

document the consideration of 

stakeholder views, one commenter 

stated that ‘‘it is already standard 

practice for clearing agencies to create 

and maintain documentation of their 

consideration of market participants’ 

viewpoints.’’ 430

C. Consideration of Benefits and Costs 

as Well as the Effects on Efficiency, 

Competition, and Capital Formation 

The final rules are designed to 

facilitate the primary goal the 

Commission sought to achieve as 

articulated in the proposing release, 

namely: improving governance of 

registered clearing agencies by 

addressing the divergent incentives 

among the agencies’ owners and 

participants, thereby improving the 

efficiency and effectiveness of the 

agencies’ risk management and efforts to 

maintain fair, orderly, and efficient 

securities markets. 

The discussion below sets forth the 

potential economic effects stemming 

from the final rules, including the 

effects on efficiency, competition, and 

capital formation. 

The benefits and costs discussed in 

this part are relative to the economic 

baseline discussed earlier, which 

includes registered clearing agencies’ 

current practices. In some instances, the 

final rules reflect what the Commission 


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431One commenter stated, ‘‘. . . the codification 

of [including participant representatives on the risk 

management committee] into a requirement will be 

beneficial, as it will ensure that registered clearing 

agencies will be obligated to meet what is currently 

akin to a ‘best practice’ ’’ (Barclays et al. at 2). 

432For these registered clearing agencies, the 

compliance costs would require a small amount of 

resources, which would be used to review the 

clearing agency’s policies and procedures in 

response to the adoption. 

433For example, to the extent that registered 

clearing agencies have boards with a majority of 

independent directors and value their current 

ability to have less than a majority of independent 

directors on the board of directors, they may incur 

additional costs because they will lose the option 

to do so. 

434See supra Part II.A.1 (discussing Rules 17Ad– 

25(b), (e), and (f)). 

435See Paolo Saguato, The Unfinished Business 

of Regulating Clearinghouses, 2020 Colum. Bus. L. 

Rev. 449, 488 (2020), available at https://journals.

library.columbia.edu/index.php/CBLR/article/view/ 

7219/3838 (‘‘The agency costs between 

clearinghouses’ shareholders and members (the 

former participating in the profits of the business, 

and the latter bearing its final costs) increase the 

moral hazard of these institutions and threaten 

clearinghouses’ systemic resilience.’’); Saguato, 

supra note 384. 

436 IDTA at 3. 

understands to be current practices at 

many registered clearing agencies. To 

the extent that a registered clearing 

agency’s current practices could 

reasonably be considered in compliance 

with part of a final rule, the registered 

clearing agency, its participants, and the 

broader market will have already 

absorbed some of the benefits of the 

final rule. The final rules codify the 

current best practices and ensure that 

every registered clearing agency is 

required to continue including these 

elements in its governance standards.431

By promoting better governance and 

enhanced risk management across all 

registered clearing agencies, the final 

rules will lead to efficiency 

improvements in the clearing agency 

market and the broader financial 

market. More resilient clearing agencies 

could ultimately contribute to the 

stability of the U.S. financial system. 

The final rules will lead to certain 

additional costs for registered clearing 

agencies. These costs will vary 

depending on the scope of a registered 

clearing agency’s current practices as it 

compares to the final rule’s 

requirements and the size of the clearing 

agency, among other factors. For 

example, we anticipate minimal 

compliance costs to the registered 

clearing agencies where current 

practices could reasonably be 

considered in compliance with the final 

rules.432 In these cases, registered 

clearing agencies could still potentially 

face indirect costs associated with the 

limitations on discretion that would 

result from the rules, including costs 

related to limiting a registered clearing 

agency’s flexibility to choose different 

governance arrangements.433

The compliance costs will be higher 

for the registered clearing agencies 

where their current practices differ from 

the final rules’ requirements. In these 

cases, many of the final rules could 

result in a registered clearing agency 

needing to amend its bylaws, rulebook, 

or other governance documents. 

Because registered clearing agencies are 

SROs, any such amendments that 

constitute rule changes would be subject 

to Commission review pursuant to Rule 

19b–4. The final rules could also cause 

a registered clearing agency to make 

different business decisions, such as 

hiring and capital expenditure 

decisions, which would not be subject 

to the same Commission review process. 

These behavioral changes are difficult to 

predict and therefore hard to quantify, 

in part because of the number of 

assumptions that would be needed to 

forecast how registered clearing 

agencies will respond to the final rules. 

The costs discussed in this part will 

be borne by registered clearing agencies 

and their participants. For registered 

clearing agencies owned by participants, 

all the costs will ultimately be passed 

on to these participants because they are 

residual beneficiaries of the clearing 

agency. For registered clearing agencies 

not owned by participants, the level of 

pass-through will depend upon a 

number of factors, including the lack of 

competition among clearing agencies. In 

both cases, the participants will likely 

pass through some of those costs to their 

customers, depending on factors such as 

the customers’ sensitivities to costs, the 

amount of competition between 

participants for customers, and 

regulatory requirements. 

The expected costs to implement the 

final rules are anticipated to be 

sufficiently small relative to the size of 

each registered clearing agency that the 

costs will not have a material effect on: 

(1) competition among the existing 

registered clearing agencies or on a new 

entrant’s ability to enter the market; (2) 

capital formation, including registered 

clearing agencies’ ability to raise capital; 

and (3) the efficiency of registered 

clearing agencies or their participants. 

1. Economic Considerations for Final 

Rule Regarding Board Composition 

As discussed in more detail above, 

final Rules 17Ad–25(b), (e), and (f) 

require that a majority of the board (or 

34 percent, if a majority of the voting 

interests are directly or indirectly held 

by participants) be independent 

directors (as determined by the 

nominating committee and precluding 

certain circumstances that affect 

independence), establish minimum 

independent director requirements for 

the composition of certain board 

committees, and identify circumstances 

that would exclude a director from 

being an independent director.434

To the extent an operating registered 

clearing agency determines that its 

current board meets the minimum 

requirements for independent directors 

on the board and board committees, the 

final rule will not directly affect the 

effectiveness of the registered clearing 

agency’s governance. To the same 

extent, the final rules will also have no 

direct effect on the management of 

divergent interests between owners and 

participants, among various types of 

participants, and between registered 

clearing agency stakeholders and the 

broader financial markets. 

To the extent operating registered 

clearing agencies need to change the 

composition of their boards or board 

committees to meet the minimum 

requirements, the final rule will help 

promote more effective governance by 

providing impartial perspectives and 

helping mitigate the effect of the 

divergent interests between owners and 

participants, among various types of 

participants, and between registered 

clearing agency stakeholders and the 

broader financial markets. More 

effective governance will improve the 

effectiveness of a registered clearing 

agency’s risk management practices, 

which will promote resilience at 

individual registered clearing agencies 

and in the broader financial markets.435

For example, more effectively managing 

divergent interests will help the 

registered clearing agency better 

internalize the costs of participant 

defaults and non-default losses which 

will mitigate a registered clearing 

agency’s incentive to underinvest in risk 

management services such as liquidity 

arrangements and risk modeling. The 

final rules will also help registered 

clearing agencies ensure that an 

appropriate risk-based margin system is 

in place. 

One commenter stated that ‘‘lopsided 

representation’’ by larger participants on 

a governing body will ‘‘enhance the 

market strength of the largest firms at 

the expense of a more competitive and 

diverse market environment.’’ 436 Given 

that the cleared derivatives market is an 

imperfect substitute for uncleared 

derivatives, some commentators also 

stated that large dealers may have an 

incentive to protect economic rents and 

therefore may urge boards to adopt 

policies that restrict the classes or 


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437See Johnson, supra note 407, at 698–700. 

438The divergent interests referred to here are 

those between owners and participants, among 

various types of participants, and between 

registered clearing agency stakeholders and the 

broader financial markets. 

439See, e.g., Lucian A. Bebchuk & Assaf Hamdani, 

Independent Directors and Controlling 

Shareholders, 165 Univ. Pa. L. Rev. 1271, 1274 

(2017), available at https://scholarship.law.upenn.

edu/penn_law_review/vol165/iss6/1/ (taking the 

position that independent directors have incentives 

to go along with controlling shareholders’ wishes 

because the directors depend on the controlling 

shareholders for election and retention, and that the 

best way to help ensure an independent director 

does not capitulate to controlling shareholders’ or 

management’s interests is to help ensure the 

independent director is accountable to (i.e., 

nominated by) another group of stakeholders); 

Donald C. Clarke, Three Concepts of the 

Independent Director, 32 Del. J. Corp. L. 73 (2007), 

available at https://scholarship.law.gwu.edu/cgi/ 

viewcontent.cgi?article=1045&context=faculty_

publications, at 83 (‘‘In the real world, of course, 

any director without security of tenure will, in the 

absence of counterincentives and assuming that the 

position is desirable, tend to be accountable to 

whoever was responsible for appointing her.’’). See 

also id. at 85 (explaining that even if directors were 

independent of shareholders, ‘‘[T]he role of the 

independent direct [as] one who is independent of 

profit-seeking shareholders as well as independent 

of management has not, however, found fertile soil 

in American corporate law scholarship or practice. 

The dominant view has been that directors who are 

responsible to many constituencies are in effect 

responsible to none . . .’’). 

440See Maria Gutierrez & Maribel Saez, 

Deconstructing Independent Directors, 13 J. Corp. L. 

Stud. 63, 90 (2013). 

441See Bruce Dravis, Director Independence and 

the Governance Process (Aug. 14, 2018), available 

at https://www.americanbar.org/groups/business_

law/publications/blt/2018/08/05_dravis/. 

442See Clarke, supra note 439, at 82–83 (‘‘If one 

is to rely on NMDs [Non-Management Director’s] to 

exercise their voting power in favor of compliance 

with external standards, then there needs to be 

some reason for believing that NMDs will be more 

likely to do so than non-NMDs. Both kinds of 

directors can be subject to sanctions for voting to 

violate clear legal obligations. If the purpose is to 

encourage corporations to act in accordance with 

principles that do not constitute legal obligations 

(for example, ‘‘maximize local employment’’), then 

it is unlikely that NMDs elected by, and 

accountable to, profit-maximizing shareholders will 

produce this result. A director serving the ‘‘public 

interest’’ should arguably be independent of 

everyone—dominant shareholders, management, 

and indeed all those who have an interest in the 

company—and follow only the dictates of her 

conscience. Assuming accountability to be a good 

thing, however, it is hard to see how such a director 

could properly be made accountable. In the real 

world, of course, any director without security of 

tenure will, in the absence of counterincentives and 

assuming that the position is desirable, tend to be 

accountable to whoever was responsible for 

appointing her.’’). 

443See, e.g., Rule 17Ad–22(e)(2). 

444This figure is based on the analysis in infra 

Part V.A. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, modified by 

Commission staff to account for an 1,800-hour 

work-year and inflation, and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits 

and overhead. See SIFMA, Management and 

Professional Earnings in the Securities Industry— 

2013 (Oct. 7, 2013). 

445This figure is based on the analysis in infra 

Part V.A. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

446Alternatively, registered clearing agencies 

might achieve compliance by reducing the board 

size and eliminating a sufficient number of nonindependent directors. 

447On the other hand, a registered clearing 

agency that does not report a majority independent 

board (or 34 percent, if a majority of the voting 

interests are directly or indirectly held by 

participants) could determine that its current slate 

of directors already satisfies the independence 

requirements in the adopted rules. 

volume of transactions that may use 

clearinghouse platforms.437 Better 

management of divergent interests 

under the final rules will improve the 

ability of indirect participants to 

compete with direct participants of the 

registered clearing agency by, for 

example, providing indirect participants 

with enhanced access to registered 

clearing agency boards. 

Some academic literature on 

corporate governance could be 

interpreted to suggest that, under the 

final definition of independent director 

and the minimum requirements for 

independent directors on the board and 

board committees, divergent interests 438

may continue to adversely affect 

governance, because independent 

directors in closely held companies may 

cede to the interests of controlling 

shareholders unless they are 

affirmatively incentivized to protect the 

interests of one or more stakeholder 

groups.439 In this context, one paper 

suggests that although independent 

directors may not be an ultimate 

solution to the agency problem for all 

companies (especially when there is 

concentrated ownership), independent 

directors can contribute to effective 

corporate governance if: (1) their 

explicit purpose is to ‘‘prevent minority 

expropriation at the hands of the blockholders,’’ (2) there is a strong regulation 

and enforcement regime, and (3) the 

nomination procedure and the design of 

incentives guarantee the independent 

director is accountable to a specific 

constituency other than controlling 

shareholders.440 Another author argues 

that including independent directors in 

the governance process provides a 

roadmap for effective corporate 

governance, but does not guarantee 

results in terms of favoritism and 

objectivity.441 While these studies on 

the benefits of independent directors 

offer mixed results and note that 

independence alone is unlikely to be 

sufficient to further motivate a director 

to act solely in the public interest,442 the 

studies also note that director 

independence, particularly when 

complemented with other governance 

requirements, may help mitigate 

divergent incentives. 

Accordingly, the Commission 

anticipates that the final independence 

rules will help mitigate divergent 

incentives when complemented with, 

among other things: (1) existing 

governance rules that emphasize the 

registered clearing agency’s 

responsibility to owners, participants 

and other stakeholders,443 and (2) 

Commission enforcement of securities 

regulations. 

In addition, standardizing the 

definition of independent director will 

improve efficiency by reducing 

economic frictions and search costs 

related to monitoring by stakeholders. 

The Commission is aware of three 

primary costs associated with the final 

rules regarding the composition of the 

board. First, the final rules will cause 

registered clearing agency boards to 

expend resources memorializing 

information that has been gathered for 

consideration in determining each 

director’s independence, and preserving 

the records of the determination. The 

Commission estimates that each 

operating registered clearing agency will 

incur a one-time burden of 

approximately $22,403 444 to comply 

with Rules 17Ad–25(b), (e), and (f). 

Registered clearing agencies will also 

expend future resources to repeat the 

above process of memorializing 

information and documenting a 

determination, possibly twice a year. 

The Commission estimates that each 

operating registered clearing agency will 

incur an annual, recurring burden of 

approximately $44,806 445 to comply 

with Rules 17Ad–25(b), (e), and (f). 

Second, registered clearing agencies 

may need to add independent directors 

to the board, either by replacing 

directors or increasing the board size.446

As mentioned earlier, approaches to 

defining independence for directors 

vary across registered clearing agencies. 

Thus, to the extent that a registered 

clearing agency’s definition of an 

‘‘independent director’’ conflicts with 

the final rules, including the 

prohibitions in Rule 17Ad–25(f), a 

registered clearing agency currently 

reporting a majority of its directors as 

independent (or 34 percent, if a majority 

of the voting interests are directly or 

indirectly held by participants) on its 

board may need to replace directors to 

comply with the rule requirements.447

Adding independent directors would 

require a registered clearing agency to 

expend resources conducting a search 

for new directors. The costs incurred by 

the registered clearing agency may vary 

based on whether it conducts its own 

search or retains an outside consultant. 


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448The Commission is basing this estimate on a 

report by The Good Search, which explains that 

their average retainer for an executive search is 

between $85,000 and $100,000, and the fee charged 

by large retained executive search firms usually 

starts at $100,000. See The Good Search, Retained 

Search Fees, available at https://tgsus.com/ 

executive-search-blog/executive-search-fees-searchfirm-pricing. The $100,000 estimate serves as a 

reasonable proxy for the amount a recruitment firm 

might charge to conduct a national search for an 

independent director. The Commission did not 

receive any comments providing an estimated cost 

of finding an independent director. 

449To be considered independent directors, 

participant employees must satisfy the 

requirements of Rule 17Ad–25, as explained in 

supra Part II.A. 

450See DTCC at 4. See also Saguato at 3. 

451See supra Part II.B.1 (discussing Rule 17Ad– 

25(c)). 

452See ICE at 3. 

453This figure is based on the analysis in infra 

Part V.B. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

454This figure is based on the analysis in infra 

Part V.B. The per hour cost is from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

455See supra Part II.C.1 (discussing Rule 17Ad– 

25(d)). 

The Commission estimates that 

retaining a recruitment specialist to 

secure an independent director could 

cost approximately $100,000 per 

director.448

Third, to the extent that nonindependent directors tend to have 

more relevant knowledge and 

experience than independent directors 

do, requiring that a majority of directors 

(or 34 percent, if a majority of the voting 

interests are directly or indirectly held 

by participants) be independent could 

reduce the depth or breadth of relevant 

expertise that can be brought to 

registered clearing agency boards. A 

reduced level of combined experience 

on a registered clearing agency board 

might impair registered clearing agency 

efficiency in the near term. However, 

this potential cost is mitigated under the 

final rules by allowing eligible 

participant employees to serve as 

independent directors.449 One 

commenter stated that allowing for the 

potential inclusion of participant 

employees as independent directors had 

several benefits, including industry 

expertise, strong alignment with the risk 

management and operational integrity of 

the registered clearing agency, and 

diverse perspectives.450

One commenter stated that adopting 

the proposed definition of independent 

director would impose costs on 

registered clearing agencies that are dual 

registered with other regulatory bodies 

because other regulatory bodies have 

different definitions of independence 

and it would require extra resources to 

evaluate a nominee’s independence 

under different standards from multiple 

regulatory entities. As explained in Part 

II.A.3, any additional costs from 

evaluating independence under 

multiple regulatory regimes are 

insignificant. 

2. Economic Considerations for Final 

Rules Regarding the Nominating 

Committee 

As discussed in more detail above, 

Rule 17Ad–25(c) establishes minimum 

requirements for nominating 

committees, including a minimum 

composition requirement, fitness 

standards for serving on the board, and 

a documented process for evaluating 

board nominees, including those who 

would meet the Commission’s 

independence criteria.451

Given that five of the six operating 

registered clearing agencies already 

have nominating committees (or a 

committee that serves a similar 

function), the primary benefit of Rule 

17Ad–25(c) is to increase the number of 

independent directors on existing 

nominating committees. Insofar as a 

lack of independent directors on a 

registered clearing agency’s nominating 

committee has prevented the registered 

clearing agency from having a fairer 

representation of its shareholders and 

participants in the selection of its 

directors and the administration of its 

affairs, Rule 17Ad–25(c) will help the 

registered clearing agency better meet 

section 17A’s fair representation 

requirements. 

One commenter expressed concern 

that the additional burdens Rule 17Ad– 

25(c) placed on independent directors 

could discourage qualified individuals 

from being willing to serve on registered 

clearing agency boards.452 The 

Commission does not think such a 

potential cost is significant, because 

several registered clearing agencies 

already have nominating committees 

that have a majority of independent 

directors, meaning that they have been 

able to find qualified directors. In 

addition, to the extent the new rules 

increase the amount of work done by 

independent directors, the burden on 

each independent director can be 

reduced by, for example, including 

more independent directors on the 

board to handle the increased workload. 

Rule 17Ad–25(c) will cause registered 

clearing agency boards to expend 

resources reviewing, revising, and 

possibly creating governance documents 

and related policies and procedures. 

The Commission estimates that each 

operating registered clearing agency will 

incur a one-time burden of 

approximately $38,590 453 to comply 

with Rule 17Ad–25(c). Registered 

clearing agencies will also need to 

expend future resources for monitoring, 

compliance, and documentation 

activities related to the new or revised 

policies and procedures. The 

Commission estimates that each 

operating registered clearing agency will 

incur an annual, recurring burden of 

approximately $13,110 454 to comply 

with Rule 17Ad–25(c). 

3. Economic Considerations for Final 

Rules Regarding the Risk Management 

Committee 

As discussed in more detail above, 

Rule 17Ad–25(d) requires each 

registered clearing agency to establish a 

RMC (or committees) of the board and 

establish minimum requirements for the 

composition, reconstitution, and 

function of such RMCs.455 Based on the 

Commission staff’s review of relevant 

governance documents, the Commission 

understands that many registered 

clearing agencies currently have written 

governance arrangements that largely 

conform to the requirements for RMCs 

in Rule 17Ad–25(d). Those registered 

clearing agencies’ governance 

documents and related policies and 

procedures will likely need minimal 

modifications. To the extent that a 

registered clearing agency’s existing 

governance documents and related 

policies and procedures are already in 

compliance with the final rules, the 

incremental compliance costs associated 

with the rule will be minimal and the 

benefits of the rule will already be 

incorporated by market participants. 

To the extent that a registered clearing 

agency’s existing governance documents 

and related policies and procedures do 

not meet the requirements set out in the 

final rules, requiring that the RMC be a 

board committee will help make the 

board’s oversight of risk management 

more effective by helping to ensure that 

a board committee is focused on risk 

management and by allowing the RMC 

to have delegated authority from the 

board. In addition, requiring that 

registered clearing agencies re-evaluate 

the RMC’s membership annually will 

help prevent stagnation of RMC 

membership and stagnant viewpoints 

about risk management, while 

maintaining the registered clearing 

agency’s discretion to preserve expertise 

on the RMC. Giving risk management a 

consistently higher priority and 

annually re-evaluating the RMC’s 


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456This figure is based on the analysis in infra 

Part V.C. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

457This figure is based on the analysis in infra 

Part V.C. The per-hour cost is from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

458See, e.g., CCP12 at 6; DTCC at 6; LSEG at 12; 

ICE at 4–5; OCC at 26–27. 

459See supra Part II.C.3. 

460See supra Part II.D.1 (discussing Rule 17Ad– 

25(g)). 

461See supra Part II.D.1 (discussing Rule 17Ad– 

25(h)). 

462This figure is based on the analysis in infra 

Part V.D and Part V.E. The per-hour costs are from 

SIFMA’s Management and Professional Earnings in 

the Securities Industry—2013, supra note 444. 

463This figure is based on the analysis in infra 

Part V.D and Part V.E. The per-hour cost is from 

SIFMA’s Management and Professional Earnings in 

the Securities Industry—2013, supra note 444. 

464See supra Part II.E.1 (discussing Rule 17Ad– 

25(i)). 

465See supra note 254 and related text. 

466See, e.g., CCP12 at 7; DTCC at 8–9; OCC at 2. 

membership will help registered 

clearing agencies act to limit their risk 

of failure. 

Rule 17Ad–25(d) will cause registered 

clearing agency boards to expend 

resources reviewing, revising, and 

possibly creating governance documents 

and related policies and procedures. 

The Commission estimates that each 

operating registered clearing agency will 

incur a one-time burden of 

approximately $3,859 456 to comply 

with Rule 17Ad–25(d). The Commission 

acknowledges that the cost may be 

higher for registered clearing agencies 

whose risk committees are not currently 

board committees. Registered clearing 

agencies will also need to expend future 

resources for monitoring, compliance, 

and documentation activities related to 

the new or revised governance 

documents and related policies and 

procedures. The Commission estimates 

that each operating registered clearing 

agency will incur an annual, recurring 

burden of approximately $1,311 457 to 

comply with Rule 17Ad–25(d). 

Multiple commenters expressed 

concern that rotating risk committee 

members on a regular basis could 

reduce expertise and institutional 

knowledge on the committee because 

members would be rotated out too 

frequently.458 The Commission has 

addressed this potential economic cost 

by modifying the proposed rule so that 

registered clearing agencies are required 

to re-evaluate, but not necessarily rotate, 

the membership of the risk committee 

annually.459

4. Economic Considerations for Final 

Rules Regarding Conflicts of Interest 

Involving Directors or Senior Managers 

As discussed in more detail above, 

Rules 17Ad–25(g) and (h) require 

policies and procedures that: (1) 

identify and document existing or 

potential conflicts of interest, mitigate 

or eliminate the conflicts of interest and 

document the actions taken,460 and (2) 

obligate directors to report potential 

conflicts.461

Each registered clearing agency’s 

existing policies and procedures for 

identifying, reporting, and mitigating 

conflicts of interest involving directors 

or senior managers will likely need 

minimal modifications. To the extent a 

registered clearing agency’s existing 

policies and procedures are already in 

compliance with the final rules, the 

benefits discussed below will already be 

incorporated by market participants. 

The final rules regarding managing 

conflicts of interest will benefit all 

clearing agencies by codifying current 

best practices, thus helping to ensure 

the continuity of these robust practices 

across all clearing agencies. This will 

benefit all clearing agencies and the 

broader financial markets by increasing 

the efficiency and resilience of the 

clearing market. 

In addition, to the extent that the final 

rules require registered clearing 

agencies to strengthen policies and 

procedures that deal with identifying, 

reporting, mitigating or eliminating, and 

documenting conflicts of interest, 

strengthening those policies and 

procedures could reduce the monitoring 

costs borne by registered clearing 

agency stakeholders. 

Finally, to the extent a previously 

undisclosed conflict of interest resulted 

in less favorable outcomes for the 

registered clearing agency—such as 

higher expenses with service providers 

or the loss of business from smaller 

participants—the final rule will improve 

the registered clearing agency’s 

profitability, operating efficiency, and 

effectiveness. 

The final rules regarding conflicts of 

interest will cause registered clearing 

agency boards to expend resources 

reviewing, revising, and possibly 

creating governance documents and 

related policies and procedures. The 

Commission estimates that each 

operating registered clearing agency will 

incur a one-time burden of 

approximately $7,644 462 to comply 

with Rules 17Ad–25(g) and (h). 

Registered clearing agencies will also 

need to expend future resources for 

monitoring, compliance, and 

documentation activities related to the 

new or revised policies and procedures. 

The Commission estimates that each 

operating registered clearing agency will 

incur an annual, recurring burden of 

approximately $2,622 463 to comply 

with Rules 17Ad–25(g) and (h). 

5. Economic Considerations for Final 

Rules Regarding Management of Risks 

From Relationships With Service 

Providers for Core Services 

As discussed in Part II.E.1 above, Rule 

17Ad–25(i) requires registered clearing 

agencies to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

require senior management to identify, 

manage, and report the risks related to 

agreements with service providers for 

core services; provide ongoing 

monitoring of the service provider 

relationships; obtain evaluation, review, 

and approval of the service provider 

relationship from the board; and govern 

relationships with those service 

providers.464

To the extent a registered clearing 

agency does not currently have policies 

and procedures in place that could 

reasonably be considered in compliance 

with the final rule, the final rule will 

enhance the clearing agency’s ability to 

assess potential risks presented by 

agreements with service providers of 

core services, including the potential for 

disruptions to the agency’s operations. 

The ongoing monitoring requirement 

will enable the clearing agency to 

identify changes to, or increases in, the 

risks associated with agreements with 

service providers of core services and 

frame a timely response to these risks. 

The final rule will also assist the 

clearing agency in developing and 

pursuing policies and procedures for 

minimizing disruptions and harm to the 

agency’s operations and customers 

should a risk associated with 

agreements with service providers be 

realized. Ultimately, the final rules will 

improve the resilience of registered 

clearing agencies and the stability of the 

broader financial system in the U.S. 

Multiple commenters understood 

proposed Rule 17Ad–25(i) to duplicate 

the work already done by management 

or to shift the responsibility for 

oversight of service providers from 

senior management to the board, 

increasing board members’ expertise or 

work requirements.465 Some 

commenters explained that the 

additional work requirements associated 

with Rule 17Ad–25(i) might 

disincentivize potential candidates from 

serving on a registered clearing agency’s 

board of directors.466 The Commission 

has modified the proposed rule text to 

specify and delineate specific 

responsibilities of senior management 

and the board in the risk management 


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467See supra Part II.E.3. 

468This figure is based on the analysis in infra 

Part V.F. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

469This figure is based on the analysis in infra 

Part V.F. The per-hour cost is from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

470See, DTCC at 10–11. See also CCP12 at 7. 

471See DTCC at 10–11. DTCC estimated that its 

three subsidiary registered clearing agencies would 

have a combined additional initial burden of 950 

hours. 

472See, e.g., DTCC at 11–12. 

473See DTCC at 11–12. DTCC estimated that its 

three subsidiary registered clearing agencies would 

have a combined additional recurring burden of 660 

hours. 

474The calculation assumes that the additional 

hours of work would be equally split between an 

assistant general counsel and a compliance 

attorney. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

475The calculation assumes that all the additional 

work would be done by a compliance attorney. The 

per-hour cost is from SIFMA’s Management and 

Professional Earnings in the Securities Industry— 

2013, supra note 444. 

476 $38,590 + $157,707 = $196,297. 

477 $13,110 + $96,140 = $109,250. 

478See supra Part II.F.1 (discussing Rule 17Ad– 

25(j)). 

479See 15 U.S.C. 78q–1(b)(3)(F). 

480See Barclays et al. at 2. 

481See Citadel at 1. 

482 DTCC at 3. 

483This figure is based on the analysis in infra 

Part V.G. The per-hour costs are from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

of service provider relationships.467

Given the defined scope of the board’s 

role, the Commission does not expect 

the rule will materially disincentivize 

potential candidates from serving on the 

board. 

The final rules regarding the board’s 

ultimate responsibility for the oversight 

of relationships with service providers 

for core services will cause registered 

clearing agencies to expend resources 

reviewing, revising, and possibly 

creating governance documents and 

related policies and procedures. For 

example, clearing agencies might need 

to create or revise policies for 

overseeing relationships with service 

providers for core services. The 

Commission estimates that each 

operating registered clearing agency will 

incur a one-time burden of 

approximately $38,590 468 to comply 

with Rule 17Ad–25(i). Registered 

clearing agencies will also need to 

expend future resources for monitoring, 

compliance, and documentation 

activities related to the new or revised 

policies and procedures. The 

Commission estimates that each 

operating registered clearing agency will 

incur an annual, recurring burden of 

approximately $13,110 469 to comply 

with Rule 17Ad–25(i). 

Multiple commenters expressed 

concern that, in addition to the 

Commission’s estimates of the initial 

and recurring costs to comply with Rule 

17Ad–25(i), some registered clearing 

agencies may incur one-time costs to 

‘‘perform various policy and procedures 

reviews,’’ provide a ‘‘gap analysis and 

training on all updated policies and 

procedures to all relevant stakeholders,’’ 

and to ‘‘have the boards conduct their 

own review of CSP third-party 

plans.’’ 470 One commenter estimated 

that, for its three participant-owned 

clearing agency subsidiaries, the 

additional initial cost per agency would 

be 317 hours.471 Commenters also stated 

that some agencies may incur additional 

recurring costs related to ‘‘monitoring 

compliance and documentation 

activities’’ and ‘‘preparing and 

presenting to the boards for review and 

approval plans for entering into thirdparty relationships with CSPs.’’ 472 One 

commenter estimated that, for the three 

participant-owned clearing agencies, the 

additional recurring annual cost per 

agency would be 220 hours.473 The 

Commission estimates that a monetary 

equivalent of these additional costs 

suggested by commenters would be an 

additional one-time cost of up to 

$157,707 474 and an annual, recurring 

cost of up to approximately $96,140 475

to comply with Rule 17Ad–25(i). The 

Commission anticipates that the 

additional costs discussed by the 

commenter would vary with the size of 

the registered clearing agency. 

Therefore, it is likely that each operating 

registered clearing agency will incur a 

one-time burden of between $38,590 

and $196,297 476 and an annual, 

recurring burden of between $13,110 

and $109,250 477 to comply with Rule 

17Ad–25(i). 

6. Economic Considerations for Final 

Rules Regarding Formalized 

Solicitation, Consideration, and 

Documentation of Stakeholders’ 

Viewpoints 

As discussed in more detail above, 

Rule 17Ad–25(j) requires policies and 

procedures to solicit, consider, and 

document the registered clearing 

agency’s consideration of the views of 

its participants and other relevant 

stakeholders regarding material 

developments in its governance and 

operations.478

To the extent registered clearing 

agency boards’ inadequate solicitation 

of stakeholder viewpoints has caused 

some stakeholder views not to be 

considered, the final rules regarding the 

solicitation, consideration, and 

documentation of stakeholders’ views 

will improve boards’ consideration of 

different stakeholder views. The 

improved consideration of different 

views is expected to help persuade 

stakeholders with divergent interests to 

assert their needs more vigorously, 

which will encourage debate among 

actors with different goals. More 

informed debates will, in turn, help to 

foster consensus with mandates and 

other decisions that are supported by a 

broader spectrum of stakeholders. 

Consequently, registered clearing 

agencies will identify and develop rule 

proposals that (to the extent the 

Commission considers them) will be 

more likely to meet the public interest 

requirements under section 17A of the 

Exchange Act.479

Some commenters pointed out 

additional potential benefits of the rule. 

One commenter stated that adopting the 

rule would ensure that all current and 

future registered clearing agencies are 

compliant with the current industry best 

practices.480 Another commenter 

provided a specific use case for the rule, 

stating that requiring the consideration 

of stakeholder views could help 

registered clearing agencies facilitate the 

transition to clearing Treasury 

securities.481

One commenter stated that requiring 

registered clearing agencies to solicit 

and consider stakeholder viewpoints for 

all material changes in governance and 

operations would likely result in 

registered clearing agency governance 

becoming ‘‘less dynamic and responsive 

to changes and risks in the markets they 

serve.’’ 482 The Commission has 

modified the requirements for 

considering stakeholder viewpoints so 

that they only pertain to risk 

management and operations, as opposed 

to all governance and operations. Given 

that registered clearing agencies already 

solicit stakeholder viewpoints, the 

reduced scope of the rule is sufficiently 

focused that the requirement will not 

cause clearing agencies to be 

significantly less dynamic or responsive 

to changes and risks. 

The final rules regarding obligations 

of the board will cause registered 

clearing agency boards to expend 

resources reviewing, revising, and 

possibly creating governance documents 

and related policies and procedures. For 

example, boards might need to create 

policies for soliciting, considering, and 

documenting the consideration of 

stakeholders’ views. The Commission 

estimates that each operating registered 

clearing agency will incur a one-time 

burden of approximately $7,086 483 to 

comply with Rule 17Ad–25(j). 


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484This figure is based on the analysis in infra 

Part V.G. The per-hour cost is from SIFMA’s 

Management and Professional Earnings in the 

Securities Industry—2013, supra note 444. 

485See CCA Standards Adopting Release, supra 

note 4, at 70806 (‘‘The Commission believes it is 

appropriate to provide covered clearing agencies 

with flexibility, subject to their obligations and 

responsibilities as SROs under the Exchange Act, to 

structure their default management processes to 

take into account the particulars of their financial 

resources, ownership structures, and risk 

management frameworks.’’). 

486See CCA Standards Adopting Release, supra 

note 4, at 70801; see also Randall S. Kroszner, 

Central Counterparty Clearing: History, Innovation, 

and Regulation, 30 Econ. Persp. 37, 41 (2006) 

(‘‘[M]ore intense government regulation of CCPs 

may prove counterproductive if it creates moral 

hazard or impedes the ability of CCPs to develop 

new approaches to risk management.’’). 

487See, e.g., DTCC at 3 (‘‘We appreciate those 

aspects of the Proposal that balance effective 

governance with general principles of dynamism 

and flexibility, and any concerns or critiques we 

raise herein with respect to other aspects of the 

Proposal are informed by this same perspective.’’). 

488See, e.g., CCP12 at 1 (‘‘. . . some of the 

Proposed Rule regarding the governance and 

conflicts of interest of clearing agencies may be too 

prescriptive, given the diversity among clearing 

agencies and the need for these organizations to 

tailor their structures and governance for the 

markets and products they clear.’’). 

489See Better Markets, at 17. Cf. Saguato, at 2 

(‘‘the distinction in board composition between 

participant-owned . . . versus investor-owned 

clearing agencies . . . is [neither] necessary [nor] 

justified’’). 

490See Better Markets at 16; ISDA at 6; IDTA at 

1. 

491See LSEG at 5. 

492See IDTA at 4. 

493See LSEG at 13. 

494See SIFMA AMG at 5. 

495See ISDA at 3 (recommending risk committee 

members serve for at least two years and no more 

than five years); SIFMA AMG, at 5 (recommending 

a three-year term). 

496See Saguato at 4; ISDA at 4. 

497See Better Markets at 22. 

498See Regulation MC Proposing Release, supra 

note 82, at 65882. 

Registered clearing agency boards will 

also need to expend future resources for 

monitoring, compliance, and 

documentation activities related to the 

new or revised policies and procedures. 

The Commission estimates that each 

operating registered clearing agency will 

incur an annual, recurring burden of 

approximately $1,748 484 to comply 

with Rule 17Ad–25(j). 

D. Reasonable Alternatives to the Final 

Rules 

1. Allow More Flexibility in 

Governance, Operations, and Risk 

Management 

When determining the content of its 

policies and procedures, each registered 

clearing agency must have the ability to 

consider the effects of its unique 

characteristics and circumstances, 

including ownership and governance 

structures, on direct and indirect 

participants, markets served, and the 

risks inherent in products cleared.485

It has been the Commission’s 

experience that particular securities 

markets (e.g., equities, fixed income, 

and options) have unique conventions, 

characteristics, and structures that are 

best addressed on a market-by-market 

basis. The Commission recognizes that a 

less prescriptive approach could help 

promote efficient and effective practices 

and encourage regulated entities to 

consider how to manage their regulatory 

obligations and risk management 

practices in a way that complies with 

Commission rules, while considering 

the particular characteristics of their 

business.486

Many commenters discussed the 

balance of allowing governance 

flexibility while still improving 

registered clearing agency corporate 

governance and stability in the broader 

financial markets.487 Some commenters 

thought the proposed rules were too 

prescriptive.488

However, registered clearing agencies 

may not fully internalize the social costs 

of differing incentives between owners 

and participants, among various types of 

participants, and between registered 

clearing agency stakeholders and the 

broader financial markets. Thus, 

allowing too much flexibility in clearing 

agency governance may not 

appropriately address the needs and 

incentives of the direct or indirect 

participants or the broader financial 

market. 

The Commission believes that the 

final rules appropriately balance the 

effects and burdens of imposing more 

prescriptive governance requirements 

on registered clearing agencies while 

also enhancing the resilience of clearing 

markets and U.S. financial system. 

2. Adopt More Prescriptive Governance 

Requirements 

Several commenters thought the final 

rules should be more prescriptive than 

the proposed rules. For example, 

commenters recommended requiring 

that all registered clearing agency 

boards have a majority of independent 

directors,489 preventing persons 

affiliated with participants from being 

considered independent,490 using a fiveyear lookback period (instead of a oneyear lookback period) when determining 

independence,491 requiring that smaller 

participants be on the board and on 

board committees,492 requiring that the 

chair of all board committees be 

independent,493 requiring fitness 

standards for RMC members,494

requiring term limits for RMC 

members,495 requiring a registered 

clearing agency to promptly report to 

the Commission whenever the board 

does not follow the recommendation of 

the risk committee,496 and requiring 

board members recuse themselves when 

they have a conflict of interest.497

However, as discussed in the previous 

reasonable alternative, other 

commenters supported less prescriptive 

governance regulations for registered 

clearing agencies. 

As discussed in the previous 

reasonable alternative, the Commission 

believes that the final rules 

appropriately balance the benefits and 

burdens of more prescriptive 

governance requirements against the 

benefits and risks of flexibility in 

governance and risk management. On 

the one hand, a more prescriptive 

governance approach could help ensure 

that registered clearing agencies 

internalize the social costs of differing 

incentives between owners and 

participants, among various types of 

participants, and between registered 

clearing agency stakeholders and the 

broader financial markets. On the other 

hand, adopting more prescriptive 

governance requirements could limit 

clearing agencies’ flexibility to 

implement policies and procedures that 

are equally effective but also take into 

account the agency’s unique 

characteristics and circumstances . The 

final rules strike a reasonable balance 

between these two considerations by 

codifying the current governance best 

practices to enhance registered clearing 

agency governance while still allowing 

registered clearing agencies to tailor 

governance structures, policies, and 

procedures to their specific needs. 

3. Establish Limits on Participant Voting 

Interests 

In 2010, the Commission proposed 

Regulation MC, which was ‘‘designed to 

mitigate potential conflicts of interest 

. . . through conditions and structures 

related to ownership, voting, and 

governance.’’ 498 Regulation MC 

proposed mitigating divergent 

incentives, especially between larger 

and smaller participant-owners, by 

imposing maximum voting interest 

limits on participants. Specifically, 

Regulation MC proposed that securitybased swap clearing agencies be 

required to choose one of two 

governance alternatives: the Voting 

Interest Alternative and the Governance 

Interest Alternative. The Voting Interest 

Alternative in part prevented any single 

participant from having more than 20 

percent ownership or voting interest in 

a clearing agency, and limited total 


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499Better Markets at 2,10. 

500See Better Markets at 15. 

501The Commission previously adopted rules to 

promote access to registered clearing agencies, 

including access for smaller participants. See 

generally Governance Proposing Release, supra note 

2, at 51816–51817 (discussing, among other rules, 

17 CFR 240.17Ad–22(b)(5) through (7)). 

502See, e.g., Saguato, supra note 435, at 488 

(‘‘[There is] significant imbalance of the economic 

exposure of clearing members vis-a`-vis 

clearinghouses and their holding groups. This 

imbalance . . . results in the misaligned incentives 

of members and share-holders, which creates 

agency costs between the firms’ primary 

stakeholders that threaten clearinghouses’ systemic 

resilience.’’). 

503See OCC, Order Approving Proposed Rule 

Change to Establish OCC’s Persistent Minimum 

Skin-In-The-Game, Exchange Act Release No. 92038 

(May 27, 2021), 86 FR 29861, 29863 (June 3, 2021) 

(‘‘The Commission continues to regard skin-in-thegame as a potential tool to align the various 

incentives of a covered clearing agency’s 

stakeholders, including management and clearing 

members.’’). 

504See, e.g., Better Markets at 5, 13–14; Barclays 

et al. at 4. 

505 ICI at 7 and n. 30. See also the discussion in 

Part II.A.4 accompanying note 75. 

506 Governance Proposing Release, supra note 2, 

at n.232 and accompanying text. 

507See, e.g., Barclays et al. at 2; ICI at 3; ISDA 

at 3; Saguato at 4; SIFMA AMG at 4; SIFMA at 3– 

4. 

participant ownership or voting 

interests to no more than 40 percent. 

The Voting Interest Alternative also 

required that at least 35 percent of the 

board be independent directors. The 

Governance Interest Alternative in part 

limited any participant to no more than 

5 percent ownership or voting interests 

in the clearing agency, and required that 

at least 51 percent of the board be 

independent directors. 

One commenter proposed adopting 

rules similar to those proposed in 

Regulation MC and further 

supplementing it ‘‘with more direct 

actions against the market power of 

large participants.’’ 499 The same 

commenter stated that the reasons the 

Commission provided for not adopting 

the bright-line rules in Regulation MC 

were not sufficient.500

The Commission has not adopted 

ownership limits in the current rules 

because rules during the intervening 

time have significantly altered how 

registered clearing agencies must treat 

smaller participants.501 In addition, 

while reduced participants’ ownership 

in registered clearing agencies can 

potentially reduce the conflicts of 

interest between large and small and 

medium participants, it could also 

reduce incentives for participants to be 

actively involved in the agency’s 

governance. This could also increase 

voting power of non-participant 

shareholders, thereby aggravating the 

conflict of interest between participants 

and non-participant owners. Given 

these considerations, the net benefit of 

limiting the voting interests of 

participants could be less than that 

under the final rules. 

4. Increase Shareholders’ At-Risk 

Capital (‘‘Skin in the Game’’) 

The final rules are intended, in part, 

to better manage divergent incentives of 

registered clearing agency owners and 

non-owner participants. One suggested 

cause of the incentive misalignment is 

owners’ lack of at-risk capital (‘‘skin in 

the game’’).502 Under the existing 

regulatory structure, for-profit registered 

clearing agencies can bifurcate risk from 

reward, sending the reward (e.g., profits) 

to owners and requiring participants to 

hold disproportionate risks (e.g., 

responsibility for non-default losses or 

participants’ defaulted positions).503 In 

the Governance Proposing Release, the 

Commission also expressed its belief 

that the proposed rules would help 

facilitate registered clearing agencies’ 

ability and motivation to adopt policies 

to further mitigate incentive 

misalignment, including a skin in the 

game requirement. 

Multiple commenters voiced support 

for a skin in the game requirement.504

One commenter disagreed with the 

Commission’s belief expressed in the 

Governance Proposing Release that the 

proposed rules would help facilitate 

registered clearing agencies’ ability to 

adopt policies such as skin in the game 

requirements and recommended that the 

Commission consider several risk 

management and resiliency initiatives, 

such as skin in the game, that were not 

within the scope of the rules 

encompassed in the proposal.505

For the reasons discussed in Part 

IV.B.3, the Commission continues to 

believe that the governance 

requirements in the final rules will help 

a registered clearing agency successfully 

manage the divergent incentives of its 

owners and participants. However, 

giving consideration to risk management 

and resiliency initiatives, such as skin 

in the game, could be appropriate in the 

future.506

5. Increase Public Disclosure 

One of the purposes of the final rules 

is to increase transparency into board 

governance. Increased transparency 

could also be achieved by requiring 

registered clearing agencies to enhance 

their governance disclosures. For 

example, the Commission could require 

registered clearing agencies to publicly 

disclose, for each director, the existence 

of any relationship or interest that 

reasonably could affect the independent 

judgment or decision-making of the 

director. This requirement could 

include each director’s affiliation with 

registered clearing agency participants. 

The Commission could require these 

disclosures to be submitted in a 

structured (i.e., machine-readable) data 

language, which could augment any 

transparency benefits resulting from the 

disclosures by increasing the efficiency 

with which they are processed. 

Transparency into board governance 

is beneficial for the clearing agency’s 

investors, regulators, and market 

participants, as it would provide a more 

complete picture of the corporate 

governance in the clearing agencies 

industry and allow better assessment of 

risks and investor protection issues as it 

relates to each registered clearing 

agency. Increased public disclosure 

could be an effective alternative 

governance mechanism for clearing 

agencies if clearing agencies were 

subject to active market discipline by 

customers and investors. However, 

registered clearing agency currently 

have attenuated exposure to such 

market governance mechanisms because 

of limited competition among clearing 

agencies and the closely held nature of 

registered clearing agencies’ ownership 

structures. Therefore, absent the final 

rules, it is possible that registered 

clearing agencies would not make any 

significant changes to their governance, 

operations, or risk management solely as 

a result of the increased public 

governance disclosure. 

In addition, to the extent a registered 

clearing agency modified its 

governance, operations, or risk 

management in response to the 

increased public disclosure, absent the 

final rules, the clearing agency would be 

incentivized to enact policies that are 

beneficial to the clearing agency without 

necessarily considering the effects of 

those policies on the resilience and 

efficiency of the clearing market as a 

whole. 

The final rules do not include 

increased public disclosure 

requirements because the current 

structure of the clearing agency market 

significantly limits the possible benefits. 

6. Require Risk Working Group in 

Addition To Risk Committee 

Multiple commenters recommended 

that the Commission require each 

registered clearing agency to have a risk 

working group, in addition to the 

RMC.507 The risk working group would 

be one of the fora through which the 

registered clearing agency could solicit 

and consider stakeholders viewpoints 

regarding material developments in the 


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508See ISDA at 5 (suggesting a risk working group 

as a forum for soliciting and considering 

stakeholder viewpoints). 

509The CFTC requirements for risk working 

groups are in 17 CFR 39.24(b). The EMIR 

requirements for risk working groups are in EMIR, 

supra note 56, Article 28. Multiple commenters 

encouraged harmonization with the CFTC’s risk 

committee rule. See, e.g., ICE at 5; ICI at 3; SIFMA 

AMG at 1. 

510See EMIR, supra note 56, Article 28 (requiring 

that the risk committee be ‘‘chaired by an 

independent member of the board.’’). 

511See EMIR, supra note 56, Article 28 (requiring 

that the risk committee ‘‘shall be composed of 

representatives of its clearing members, 

independent members of the board and 

representatives of its clients.’’). 

512See 17 CFR 39.24(b)(11)(ii) (The CFTC 

requires that ‘‘A risk management committee 

includes at least two clearing member 

representatives, and, if applicable, at least two 

representatives of customers of clearing 

members.’’). 

513See LSEG at 11 (‘‘owners are not permitted to 

be on the RMC under EMIR’’). 

514See 17 CFR 39.24(b)(11)(iii) (The CFTC 

requires that ‘‘membership of a risk management 

committee is rotated on a regular basis.’’). 

515Several commenters recommended requiring 

diverse representation from among participants 

(See, e.g., IDTA at 3; CCP12 at 6). 

516See 44 U.S.C. 3501 et seq. 517See Governance Proposing Release, supra note 

2, at 51851. 518The existing record maintenance and 

preservation requirements in Rule 17a–1 require a 

registered clearing agency to keep and preserve at 

least one copy of all documents, including all 

correspondence, memoranda, papers, books, 

notices, accounts, and other such records as shall 

be made or received by it in the course of its 

business as such and in the conduct of its selfregulatory activity. Accordingly, under the existing 

provisions of Rule 17a–1, registered clearing 

agencies are required to preserve at least one copy 

of records created for the purposes of complying 

with Rule 17Ad–25 for at least five years, with the 

first two years in an easily accessible place. 

519See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of 

the Freedom of Information Act provides an 

exemption for trade secrets and commercial or 

financial information obtained from a person and 

privileged or confidential. See 5 U.S.C. 552(b)(4). 

Exemption 8 of the Freedom of Information Act 

provides an exemption for matters that are 

contained in or related to examination, operating, 

or condition reports prepared by, on behalf of, or 

for the use of an agency responsible for the 

regulation or supervision of financial institutions. 

See 5 U.S.C. 552(b)(8). 

520The Governance Proposing Release identified 

ten respondents, based on nine registered clearing 

agencies; however, on November 9, 2023, the 

Commission approved the withdrawal of one 

registered clearing agency, reducing the number of 

respondents. See Release No. 34–98902 (Nov. 9, 

2023). 

521See Governance Proposing Release, supra note 

2, at 51820–27. 

522This figure is calculated as follows: ((Chief 

Compliance Officer for 4 hours) + (Compliance 

Attorney for 40 hours)) = 44 hours. 

523This figure is calculated as follows: ((Chief 

Compliance Officer for 1 hours) + (Compliance 

Attorney for 4 hours)) = 5 hours. 

524This figure is calculated as follows: 49 hours 

× 9 respondent clearing agencies = 441 hours. 

525This figure is calculated as follows: ((Chief 

Compliance Officer for 10 hours) + (Compliance 

Attorney for 88 hours)) = 98 hours. 

registered clearing agency’s risk 

management, in accordance with Rule 

17Ad–25(j).508 Unlike the RMC, the risk 

working group would be an advisory 

group. To harmonize with the existing 

CFTC and EMIR requirements for a risk 

working group,509 the Commission 

could require that the risk working 

group be chaired by an independent 

member of the board,510 include 

indirect participants 511 and customers 

of participants (i.e., end users),512 not 

include owners,513 and have its 

membership rotated on a regular 

basis.514 The Commission could also 

require representatives from direct 

participants of varying sizes.515

Requiring a risk working group would 

benefit registered clearing agencies by 

clearly harmonizing with CTFC and 

EMIR requirements. On the other hand, 

requiring a risk working group could 

impose costs on a registered clearing 

agency if the registered clearing agency 

is not regulated by the CFTC or subject 

to EMIR and prefers to use a different 

forum to solicit and consider 

stakeholders viewpoints regarding 

material developments in the registered 

clearing agency’s risk management. The 

Commission is not adopting a rule to 

require risk working groups because the 

benefits of doing so do not justify the 

potential costs of a clearing agency’s 

reduced flexibility in how it structures 

its governance arrangements. The 

Commission’s decision to not require a 

risk working group does not impose any 

additional costs on clearing agencies. 

Clearing agencies that are also regulated 

by the CFTC or subject to EMIR can use 

the requisite risk working group as a 

forum for satisfying the requirements of 

Rule 17Ad–25(j). 

V. Paperwork Reduction Act 

As discussed in the Governance 

Proposing Release, Rule 17Ad–25 

contains ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).516 The Commission submitted 

the proposed collections of information 

to the Office of Management and Budget 

(‘‘OMB’’) for review in accordance with 

the PRA. The title of the information 

collection is ‘‘Rule 17Ad–25—Clearing 

Agency Governance and Conflicts of 

Interest’’ (OMB Control No. 3235–0800). 

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless it 

displays a currently valid OMB control 

number. 

As discussed further below and 

previously in the Governance Proposing 

Release,517 Rules 17Ad–25(b) through 

(d) and (g) through (j) each contain 

collections of information. The 

collections in Rules 17Ad–25(b) through 

(d) and (g) through (j) are mandatory.518

To the extent that the Commission 

receives confidential information 

pursuant to this collection of 

information, such information would be 

kept confidential subject to the 

provisions of applicable law.519

Respondents under these rules are 

registered clearing agencies, of which 

there are currently eight.520 The 

Commission continues to estimate for 

purposes of this PRA that one additional 

entity may seek to register as a clearing 

agency in the next three years, and so 

for purposes of this release the 

Commission has assumed nine 

respondents. 

A. Rule 17Ad–25(b) 

The requirements and purpose of Rule 

17Ad–25(b), as modified at adoption, 

have been discussed in Part II.A and 

also in the Governance Proposing 

Release.521 Specifically, the 

Commission is modifying Rule 17Ad– 

25(b)(2)(iii) with a technical change to 

specify that the documentation 

requirement applies to both the clearing 

agency’s evaluation of director 

independence and its ultimate 

determination (i.e., whether the director 

qualifies as an independent director or 

is not an independent director). Because 

the modification is consistent with the 

discussion of the proposed rule in the 

Governance Proposing Release, the 

burden is unchanged from the original 

proposal. Accordingly, the Commission 

continues to estimate that Rule 17Ad– 

25(b)(2) will require respondent clearing 

agencies to incur a one-time burden of 

44 hours to memorialize information 

that has been gathered for the person(s) 

making the determination to consider 

prior to making it,522 as well as 5 hours 

to document and preserve the records of 

the evaluation and determination.523

The Commission also continues to 

estimate that the initial activities 

required by Rule 17Ad–25(b)(2) will 

impose an aggregate initial burden on 

respondent clearing agencies of 441 

hours.524 Due to the fact that board 

composition changes on occasion after 

elections or due to unexpected events 

such as restructuring, resignations, or 

deaths, the Commission continues to 

estimate that respondent clearing 

agencies will incur an ongoing annual 

burden of 98 hours to repeat the above 

process of memorializing information 

and documenting a determination twice 

a year.525 The Commission also 

continues to estimate that the ongoing 

activities required by Rule 17Ad– 

25(b)(2) impose an aggregate ongoing 


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526This figure is calculated as follows: 98 hours 

× 9 respondent clearing agencies = 882 hours. 

527See Governance Proposing Release, supra note 

2, at 51828–30. 

528See id. at 51852. 

529 17 CFR 240.17ad–22(d)(8), (e)(2). 

530This figure is calculated as follows: ((Assistant 

General Counsel for 30 hours) + (Compliance 

Attorney for 50 hours)) = 80 hours × 9 respondent 

clearing agencies = 720 hours. 

531This figure is calculated as follows: 

(Compliance Attorney for 30 hours) × 9 respondent 

clearing agencies = 270 hours. 

532See Governance Proposing Release, supra note 

2, at 51830–33. 

533See id. at 51852. 

534Because the written governance arrangements 

at many registered clearing agencies already largely 

conform to the requirements for RMCs, registered 

clearing agencies may need to make only limited 

changes to update their governing documents and 

related policies and procedures to help ensure 

compliance with Rules 17Ad–25(d)(1) and (2). See 

Governance Proposing Release, supra note 2, at 

51852. 

535See id. at 51832–33. 

536This figure is calculated as follows: ((Assistant 

General Counsel for 3 hours) + (Compliance 

Attorney for 5 hours)) = 8 hours × 9 respondent 

clearing agencies = 72 hours. 

537This figure is calculated as follows: 

(Compliance Attorney for 3 hours) × 9 respondent 

clearing agencies = 27 hours. 

538See Governance Proposing Release, supra note 

2, at 51833–35. 

burden on respondent clearing agencies 

of 882 hours.526

B. Rule 17Ad–25(c) 

The requirements and purpose of Rule 

17Ad–25(c) have been discussed in Part 

II.B and also in the Governance 

Proposing Release.527 As discussed in 

the Governance Proposing Release,528

Rule 17Ad–25(c)(1) through (4) add 

governance requirements regarding the 

nominating committee of the board that 

do not appear in the existing 

requirements for governance 

arrangements in Rules 17Ad–22(d)(8) 

and 17Ad–22(e)(2).529 Because the 

governance requirements in Rule 17Ad– 

25(c) are consistent with the discussion 

of the proposed rule in the Governance 

Proposing Release, the initial burden is 

unchanged from the original proposal. 

Therefore, the Commission continues to 

expect that the PRA burden for a 

respondent clearing agency includes the 

incremental burdens of reviewing and 

revising existing governance documents 

and related policies and procedures, 

and creating new governance 

documents and related policies and 

procedures, as necessary, pursuant to 

the rule. Accordingly, the Commission 

continues to estimate that respondent 

clearing agencies will incur an aggregate 

one-time burden of approximately 720 

hours to review and revise existing 

governance documents and related 

policies and procedures and to create 

new governance documents and related 

policies and procedures, as 

necessary.530

Rule 17Ad–25(c)(1) through (4) also 

impose ongoing burdens on a 

respondent clearing agency. As 

discussed in the Governance Proposing 

Release, the rule will require ongoing 

monitoring and compliance activities 

with respect to governance documents 

and related policies and procedures 

created in response to the rule, and 

ongoing documentation activities with 

respect to the implementation of a 

written process for a nominating 

committee to evaluate board nominees 

or directors, pursuant to the rule. In 

addition, as discussed in Part II.B.2, the 

Commission is modifying Rule 17Ad– 

25(c) in two ways: the Commission is 

modifying paragraph (1) to add that the 

nominating committee shall ‘‘evaluate 

the independence of nominees and 

directors,’’ in addition to nominees for 

serving as directors, and paragraph 

(4)(iv) in two places to specify that the 

evaluation process applies to nominees 

as well as directors. Because this 

modification is consistent with the 

discussion of the proposed rule in the 

Governance Proposing Release, the 

ongoing burden is unchanged from the 

original proposal. Accordingly, the 

Commission continues to estimate that 

the ongoing activities required by Rule 

17Ad–25(c)(1) through (4) impose an 

aggregate annual burden on respondent 

clearing agencies of 270 hours.531

C. Rule 17Ad–25(d) 

The requirements and purpose of Rule 

17Ad–25(d) have been discussed in Part 

II.C and also in the Governance 

Proposing Release.532 As discussed in 

the Governance Proposing Release,533

the Commission understands that many 

registered clearing agencies currently 

have written governance arrangements 

that largely conform to the requirements 

for RMCs in Rules 17Ad–25(d)(1) and 

(2). Therefore, the Commission 

continues to expect that the PRA burden 

for a respondent clearing agency 

includes the incremental burdens of 

reviewing and revising its existing 

governance documents and related 

policies and procedures and creating 

new governance documents and related 

policies and procedures, as necessary, 

pursuant to the rule.534 As discussed in 

Part II.C.3, the Commission is adopting 

Rule 17Ad–25(d) as proposed, with 

modifications. Specifically, Rule 17Ad– 

25(d)(1) has been modified to reflect 

that: (1) the RMC is ‘‘of the board’’ of the 

registered clearing agency; (2) the RMC’s 

membership must be re-evaluated 

annually.’’ Additionally, Rule 17Ad– 

25(d)(2) has been modified to reflect 

that the RMC’s work must support the 

‘‘overall risk management, safety and 

efficiency of the registered clearing 

agency.’’ However, these modifications 

would impose the same burden as the 

original proposal because, as discussed 

in the Governance Proposing Release, 

the proposed requirement to 

‘‘reconstitute’’ the RMC provides each 

registered clearing agency with 

discretion to determine the appropriate 

timing for reconstitution, explaining 

that, for example, the charter for the 

RMC could establish that the committee 

will conduct a review of its members 

annually to assess whether the 

committee continues to be an accurate 

reflection of the clearing agency’s 

owners and participants.535

Accordingly, the Commission continues 

to estimate that respondent clearing 

agencies will incur an aggregate onetime burden of approximately 72 hours 

to review and revise existing governance 

documents and related policies and 

procedures and to create new 

governance documents and related 

policies and procedures, as 

necessary.536

Rules 17Ad–25(d)(1) and (2) also 

impose ongoing burdens on a 

respondent clearing agency, including 

ongoing monitoring and compliance 

activities with respect to the governance 

documents and related policies and 

procedures created in response to the 

rule. The rule also requires ongoing 

documentation activities with respect to 

the establishment of an RMC. Although 

the Commission has modified Rule 

17Ad–25(d)(1) and (2) for the same 

reasons as discussed above, the ongoing 

burden will be unchanged from the 

Governance Proposing Release. 

Accordingly, the Commission continues 

to estimate that the ongoing activities 

required by Rules 17Ad–25(d)(1) and (2) 

impose an aggregate annual burden on 

respondent clearing agencies of 27 

hours.537

D. Rule 17Ad–25(g) 

The requirements and purpose of Rule 

17Ad–25(g) have been discussed in Part 

II.D and also in the Governance 

Proposing Release.538 As discussed in 

the Governance Proposing Release, Rule 

17Ad–25(g)(1) contains similar 

provisions to Rules 17Ad–22(d)(8) and 

17Ad–22(e)(2), in that it references clear 

and transparent governance 

arrangements but also adds additional 

requirements that do not appear in those 

existing rules. The Commission expects 

that a respondent clearing agency may 

have written rules, policies, and 

procedures similar to the requirements 


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539This figure is calculated as follows: ((Assistant 

General Counsel for 5 hours) + (Compliance 

Attorney for 3 hours)) = 8 hours × 9 respondent 

clearing agencies = 72 hours. 

540This figure is calculated as follows: 

(Compliance Attorney for 3 hours) × 9 respondent 

clearing agencies = 27 hours. 

541This figure is calculated as follows: ((Assistant 

General Counsel for 3 hours) + (Compliance 

Attorney for 2 hours)) = 5 hours × 9 respondent 

clearing agencies = 45 hours. 

542This figure is calculated as follows: 

(Compliance Attorney for 2 hours) × 9 respondent 

clearing agencies = 18 hours. 

543See Governance Proposing Release, supra note 

2, at 51833, 51835. 

544See id. at 51853–54. 

545This figure is calculated as follows: ((Assistant 

General Counsel for 1 hours) + (Compliance 

Attorney for 1 hours)) = 2 hours × 9 respondent 

clearing agencies = 18 hours. 

546This figure is calculated as follows: 

(Compliance Attorney for 1 hours) × 9 respondent 

clearing agencies = 9 hours. 

547See Governance Proposing Release, supra note 

2, at 51835–37. 

548See id. 

549See 17 CFR 240.17ad-22(e)(3)(i). In addition, 

the Commission notes that, currently, all registered 

clearing agencies are covered clearing agencies. 

550See supra Part IV.B.4.c. 

551 17 CFR 240.17ad–22(d)(4), (e)(17). 

552See DTCC at 11 (stated that an additional 660 

hours in annual burden would be required beyond 

the Commission’s initial calculation). 

in the rule, and that the PRA burden 

includes the incremental burdens of 

reviewing and revising current policies 

and procedures and creating new 

policies and procedures, as necessary, 

pursuant to the rule. Accordingly, the 

Commission continues to estimate that 

respondent clearing agencies will incur 

an aggregate one-time burden of 

approximately 72 hours to review and 

revise existing policies and procedures 

and to create new policies and 

procedures as necessary to ensure 

compliance with Rule 17Ad–25(g)(1).539

Rule 17Ad–25(g)(1) also imposes 

ongoing burdens on a respondent 

clearing agency, including ongoing 

monitoring and compliance activities 

with respect to its policies and 

procedures under the rule. As discussed 

in the Governance Proposing Release, 

Rule 17Ad–25(g)(1) requires a registered 

clearing agency to update current 

policies and procedures or establish 

new policies and procedures to ensure 

compliance. The Commission continues 

to estimate that the ongoing activities 

required by Rule 17Ad–25(g)(1) impose 

an aggregate annual burden on 

respondent clearing agencies of 27 

hours.540

Like paragraph (g)(1), paragraph (g)(2) 

also contains similar provisions to Rules 

17Ad–22(d)(8) and 17Ad–22(e)(2), in 

that it references clear and transparent 

governance arrangements but also adds 

additional requirements that do not 

appear in those rules. As discussed in 

the Governance Proposing Release, the 

Commission continues to expect that a 

respondent clearing agency may have 

written rules, policies, and procedures 

similar to the requirements in the rule 

and that the PRA burden includes the 

incremental burdens of reviewing and 

revising current policies and procedures 

and creating new policies and 

procedures, as necessary, pursuant to 

the rule. The Commission recognizes 

that while registered clearing agencies 

may have existing policies and 

procedures to comply with Rule 17Ad– 

25(g)(1), they may not have current 

policies and procedures designed 

specifically to mitigate or eliminate and 

document how the conflict of interest 

was mitigated or eliminated, as required 

by Rule 17Ad–25(g)(2). Accordingly, the 

Commission continues to estimate that 

respondent clearing agencies will incur 

an aggregate one-time burden of 

approximately 45 hours to review and 

revise existing policies and procedures 

and to create new policies and 

procedures as necessary to help ensure 

compliance with Rule 17Ad–25(g)(2).541

Rule 17Ad–25(g)(2) also imposes 

ongoing burdens on a respondent 

clearing agency, including ongoing 

monitoring and compliance activities 

with respect to its policies and 

procedures under the rule. As discussed 

in the Governance Proposing Release, 

Rule 17Ad–25(g)(2) requires updating 

current policies and procedures or 

establishing new policies and 

procedures to ensure compliance. The 

Commission continues to estimate that 

the ongoing activities required by Rule 

17Ad–25(g)(2) impose an aggregate 

annual burden on respondent clearing 

agencies of 18 hours.542

E. Rule 17Ad–25(h) 

The requirements and purpose of Rule 

17Ad–25(h) have been discussed in Part 

II.D and also in the Governance 

Proposing Release.543 As discussed in 

the Governance Proposing Release,544

Rule 17Ad–25(h) contains similar 

provisions to Rules 17Ad–22(d)(8) and 

17Ad–22(e)(2), in that it references clear 

and transparent governance 

arrangements but also adds additional 

requirements that do not appear in those 

rules. The Commission continues to 

expect that a respondent clearing agency 

may have written rules, policies, and 

procedures similar to the requirements 

in the rule and that the PRA burden 

includes the incremental burdens of 

reviewing and revising current policies 

and procedures and creating new 

policies and procedures, as necessary, 

pursuant to the rule. Accordingly, the 

Commission continues to estimate that 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 18 hours to review and 

revise existing policies and procedures 

and to create new policies and 

procedures as necessary to ensure 

compliance with Rule 17Ad–25(h).545

Rule 17Ad–25(h) also imposes 

ongoing burdens on a respondent 

clearing agency, including ongoing 

monitoring and compliance activities 

with respect to its policies and 

procedures under the rule. The 

Commission continues to estimate that 

the ongoing activities required by Rule 

17Ad–25(h) impose an aggregate annual 

burden on respondent clearing agencies 

of 9 hours.546

F. Rule 17Ad–25(i) 

The requirements and purpose of Rule 

17Ad–25(i) have been discussed in Part 

II.E and also in the Governance 

Proposing Release.547 As discussed in 

the Governance Proposing Release,548

certain aspects of the rule may be 

addressed in existing requirements. For 

example, Rule 17Ad–25(i)(1) references 

the existence of a risk management 

framework but does not itself require 

the creation of such framework, 

maintenance of which is instead 

required for covered clearing agencies 

under Rule 17Ad–22(e)(3)(i).549

Additionally, as discussed above,550

there are existing requirements for 

managing operational risk under Rule 

17Ad–22(d)(4) and Rule 17Ad– 

22(e)(17).551 Therefore, the Commission 

expects that the PRA burden for a 

respondent clearing agency includes the 

incremental burdens of reviewing and 

revising its existing governance 

documents and related policies and 

procedures and creating new 

governance documents and related 

policies and procedures, as necessary, 

pursuant to the rule. However, as 

discussed further in Part II.E, the 

Commission is modifying the rule in 

several ways in response to comments 

regarding potential interpretations of the 

proposed rule text and the resulting 

burdens, which some commenters 

believe are substantially higher than the 

estimates in the Governance Proposing 

Release.552 Because these modifications 

in the final rule are intended to align the 

rule text with the Commission’s 

expectations at proposal and generally 

accepted corporate governance 

principles, which are themselves 

generally aligned with the 

recommendations and analysis provided 

by commenters, the initial burden 

estimates in the original proposal 

remain accurate. The modifications are 

meant to clearly differentiate the roles of 


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553This figure is calculated as follows: ((Assistant 

General Counsel for 30 hours) + (Compliance 

Attorney for 50 hours)) = 80 hours × 9 respondent 

clearing agencies = 720 hours. 554See Governance Proposing Release, supra note 

2, at 51854. 

555This figure is calculated as follows: 

(Compliance Attorney for 30 hours) × 9 respondent 

clearing agencies = 270 hours. 

556See Governance Proposing Release, supra note 

2, at 51838. 

557See id. at 51854. 

558See 17 CFR 240.17ad–22(d)(8), (e)(2). 

559See supra Part II.F.3 (discussing Rule 17Ad– 

25(j)). 560See id. 561This figure was calculated as follows: 

((Assistant General Counsel for 8 hours) + 

(Compliance Attorney for 6 hours)) = 14 hours × 9 

respondent clearing agencies = 126 hours. 

562See Governance Proposing Release, supra note 

2, at 51854. 

563This figure was calculated as follows: 

(Compliance Attorney for 4 hours) × 9 respondent 

clearing agencies = 36 hours. 

564See 5 U.S.C. 601 et seq. 

565 5 U.S.C. 603(a). 

566Section 601(b) of the RFA permits agencies to 

formulate their own definitions of ‘‘small entities.’’ 

See 5 U.S.C. 601(b). The Commission has adopted 

definitions for the term ‘‘small entity’’ for the 

purposes of rulemaking in accordance with the 

RFA. These definitions, as relevant to this 

rulemaking, are set forth in 17 CFR 240.0–10. 

567See 5 U.S.C. 605(b). 

senior management and the board in the 

context of Rule 17Ad–25(i) while 

preserving the intended impact of the 

proposed rule. In this regard, while the 

words and phrases in the proposed rule 

have changed and moved, the burdens 

remain unchanged. Accordingly, the 

Commission continues to estimate that 

respondent clearing agencies will incur 

an aggregate one-time burden of 

approximately 720 hours to review and 

revise existing governance documents 

and related policies and procedures and 

to create new governance documents 

and related policies and procedures, as 

necessary.553

Rule 17Ad–25(i) also imposes ongoing 

burdens on a respondent clearing 

agency, including ongoing 

documentation, monitoring, and 

compliance activities with respect to the 

governance documents and related 

policies and procedures created in 

response to the rule. For the same 

reasons as those discussed above 

regarding the initial burdens of the final 

rule, the burdens in the original 

proposal remain an accurate assessment 

of the anticipated ongoing burdens. 

Accordingly, as discussed in the 

Governance Proposing Release,554 the 

Commission continues to estimate that 

the ongoing activities required by Rule 

17Ad–25(i) impose an aggregate annual 

burden on respondent clearing agencies 

of 270 hours.555

G. Rule 17Ad–25(j) 

The requirements and purpose of 

Rule17Ad–25(j) have been discussed in 

Part II.F and also in the Governance 

Proposing Release.556 As discussed in 

the Governance Proposing Release,557

Rule 17Ad–25(j) contains similar 

provisions to Rules 17Ad–22(d)(8) and 

17Ad–22(e)(2) but will also impose 

additional governance obligations that 

do not appear in existing requirements, 

such as obligations to solicit and 

document its consideration of input 

received from certain types of relevant 

stakeholders, including, for example, 

customers of clearing agency 

participants.558 As discussed in Part 

II.F.3, the Commission has modified the 

rule at adoption so that the scope of 

topics on which a registered clearing 

agency seeks input under the rule is 

‘‘risk management and operations’’ 

rather than ‘‘governance and 

operations.’’ 559 However, this 

modification specifies the scope that 

was originally intended and discussed 

in the Governance Proposing Release.560

Accordingly, the Commission continues 

to expect that a respondent clearing 

agency may have written rules, policies, 

and procedures similar to some of the 

requirements in the rule and that the 

PRA burden includes the incremental 

burdens of reviewing and revising 

existing policies and procedures and 

creating new policies and procedures, as 

necessary, pursuant to the rule. In 

addition, the Commission continues to 

estimate that respondent clearing 

agencies will incur an aggregate onetime burden of approximately 126 hours 

to review and revise existing policies 

and procedures and to create new 

policies and procedures, as 

necessary.561

Rule 17Ad–25(j) also imposes ongoing 

burdens on a respondent clearing 

agency, including ongoing monitoring 

and compliance activities with respect 

to the written policies and procedures 

created in response to the rule. As 

discussed in the Governance Proposing 

Release, the rule will also require 

ongoing documentation activities with 

respect to the board’s consideration of 

participants’ and relevant stakeholders’ 

views pursuant to the rule.562 The 

Commission continues to estimate that 

the ongoing activities required by Rule 

17Ad–25(j) impose an aggregate annual 

burden on respondent clearing agencies 

of 36 hours.563

H. Chart of Total PRA Burdens 

Name of information 

collection Type of burden Number of respondents 

Initial burden 

per entity 

(hours) 

Ongoing 

burden per 

entity 

(hours) 

Total annual 

burden per 

(hours) entity 

(hours) 

Total 

industry 

burden 

(hours) 

17Ad–25(b) ......................... Recordkeeping ................... 9 49 98 147 1,323 

17Ad–25(c) .......................... Recordkeeping ................... 9 80 30 110 990 

17Ad–25(d) ......................... Recordkeeping ................... 9 8 3 11 99 

17Ad–25(g) ......................... Recordkeeping ................... 9 13 5 18 162 

17Ad–25(h) ......................... Recordkeeping ................... 9 2 1 3 27 

17Ad–25(i) ........................... Recordkeeping ................... 9 80 30 110 990 

17Ad–25(j) ........................... Recordkeeping ................... 9 14 4 18 162 

VI. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires the Commission, in 

promulgating rules, to consider the 

impact of those rules on small 

entities.564 Section 603(a) of the 

Administrative Procedure Act,565 as 

amended by the RFA, generally requires 

the Commission to undertake a 

regulatory flexibility analysis of all 

proposed rules to determine the impact 

of such rulemaking on ‘‘small 

entities.’’ 566 Section 605(b) of the RFA 

states that this requirement shall not 

apply to any proposed rule which, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities.567 The 

Commission certified in the Governance 

Proposing Release, pursuant to section 

605(b) of the RFA, that the proposed 

rules would not, if adopted, have a 

significant impact on a substantial 

number of small entities. The 

Commission received no comments on 

this certification. 


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568See 17 CFR 240.0–10(d). 

569See supra notes 379–380 and accompanying 

text (discussing volume of activity in the cleared 

SBS market and the value of transactions processed 

by DTCC and OCC). The notional value of CDS 

cleared by ICE was $23.8 trillion and $17.0 trillion 

in 2022 and 2021, respectively. See ICE, 2022 

Annual Report,450739CLEANLPDF_LAN_

26Mar202318511551_013.PDF (q4cdn.com). The 

notional value of CDS cleared by LCH SA was 

Ö3,367 billion and $2,283 billion in 2022 and 2021, 

respectively. See LCH Group Holdings Ltd., 2022 

Annual Report, https://www.lch.com/system/files/ 

media_root/lch-group-holdings-limited-financialstatements-2022.pdf. In each case, these volumes 

exceed the $500 million threshold for small entities. 

570See 17 CFR 240.0–10(d). The Commission 

based this determination on its review of public 

sources of financial information about registered 

clearing agencies. 

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

A. Registered Clearing Agencies 

Rule 17Ad–25 applies to all registered 

clearing agencies. For the purposes of 

Commission rulemaking and as 

applicable to Rule 17Ad–25, a small 

entity includes, when used with 

reference to a clearing agency, a clearing 

agency that (i) compared, cleared, and 

settled less than $500 million in 

securities transactions during the 

preceding fiscal year, (ii) had less than 

$200 million of funds and securities in 

its custody or control at all times during 

the preceding fiscal year (or at any time 

that it has been in business, if shorter), 

and (iii) is not affiliated with any person 

(other than a natural person) that is not 

a small business or small 

organization.568

Based on the Commission’s existing 

information about the clearing agencies 

currently registered with the 

Commission,569 all such registered 

clearing agencies exceed the thresholds 

defining ‘‘small entities’’ set out above. 

While other clearing agencies may 

emerge and seek to register as clearing 

agencies with the Commission, no such 

entities would be ‘‘small entities’’ as 

defined in Exchange Act Rule 0–10.570

B. Certification 

For the reasons described above, the 

Commission certifies that Rule 17Ad–25 

does not have a significant economic 

impact on a substantial number of small 

entities for purposes of the RFA. 

VII. Other Matters 

If any of the provisions of these rules, 

or the application thereof to any person 

or circumstance, is held to be invalid, 

such invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

Pursuant to the Congressional Review 

Act,571 the Office of Information and 

Regulatory Affairs has designated these 

rules as not a ‘‘major rule,’’ as defined 

by 5 U.S.C. 804(2). 

Statutory Authority 

The Commission is adopting Rule 

17Ad–25 under the Commission’s 

rulemaking authority in the Exchange 

Act, particularly Section 17(a), 15 U.S.C. 

78q(a), Section 17A, 15 U.S.C. 78q–1, 

Section 23(a), 15 U.S.C. 78w(a), Section 

765 of the Dodd-Frank Act, and 805 of 

the Clearing Supervision Act, 15 U.S.C. 

8343 and 15 U.S.C. 5464 respectively. 

List of Subjects in 17 CFR Part 240 

Reporting and recordkeeping 

requirements, Securities. 

Text of Amendment 

In accordance with the foregoing, title 

17, chapter II of the Code of Federal 

Regulations is amended as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The authority citation for part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l, 

78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 

78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111–203, 939A, 124 

Stat. 1376 (2010); and Public Law 112–106, 

sec. 503 and 602, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

■ 2. Section 240.17ad–25 is added after 

§ 240.17Ad–24 to read as follows: 

§ 240.17ad–25 Clearing agency boards of 

directors and conflicts of interest. 

(a) Definitions. All terms used in this 

section have the same meaning as in the 

Securities Exchange Act of 1934, and 

unless the context otherwise requires, 

the following definitions apply for 

purposes of this section: 

Affiliate means a person that directly 

or indirectly controls, is controlled by, 

or is under common control with the 

registered clearing agency. 

Board of directors means the board of 

directors or equivalent governing body 

of the registered clearing agency. 

Director means a member of the board 

of directors or equivalent governing 

body of the registered clearing agency. 

Family member means any child, 

stepchild, grandchild, parent, 

stepparent, grandparent, spouse, sibling, 

niece, nephew, mother-in-law, father-inlaw, son-in-law, daughter-in-law, 

brother-in-law, or sister-in-law, 

including adoptive relationships, any 

person (other than a tenant or employee) 

sharing a household with the director or 

a nominee for director, a trust in which 

these persons (or the director or a 

nominee for director) have more than 50 

percent of the beneficial interest, a 

foundation in which these persons (or 

the director or a nominee for director) 

control the management of assets, and 

any other entity in which these persons 

(or the director or a nominee for 

director) own more than 50 percent of 

the voting interests. 

Independent director means a director 

of the registered clearing agency who 

has no material relationship with the 

registered clearing agency or any 

affiliate thereof. 

Material relationship means a 

relationship, whether compensatory or 

otherwise, that exists or existed during 

a lookback period of one year from the 

initial determination in paragraph (b)(2) 

and that reasonably could affect the 

independent judgment or decisionmaking of the director. 

Service provider for core services 

means any person that, through a 

written services provider agreement for 

services provided to or on behalf of the 

registered clearing agency, on an 

ongoing basis, directly supports the 

delivery of clearance or settlement 

functionality or any other purposes 

material to the business of the registered 

clearing agency. 

(b) Composition of the board of 

directors. (1) A majority of the members 

of the board of directors of a registered 

clearing agency must be independent 

directors, unless a majority of the voting 

interests issued as of the immediately 

prior record date are directly or 

indirectly held by participants, in which 

case at least 34 percent of the members 

of the board of directors must be 

independent directors. 

(2) Each registered clearing agency 

shall broadly consider all the relevant 

facts and circumstances, including 

under paragraph (g) of this section, on 

an ongoing basis, to affirmatively 

determine that a director does not have 

a material relationship with the 

registered clearing agency or an affiliate 

of the registered clearing agency, and is 

not precluded from being an 

independent director under paragraph 

(f) of this section. In making such 

determination, a registered clearing 

agency must: 

(i) Identify the relationships between 

a director and the registered clearing 

agency or any affiliate thereof and any 

circumstances under paragraph (f) of 

this section; 


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(ii) Evaluate whether any relationship 

is likely to impair the independence of 

the director in performing the duties of 

director; and 

(iii) Document the evaluation and 

determination in writing. 

(c) Nominating committee. (1) Each 

registered clearing agency must 

establish a nominating committee and a 

written evaluation process whereby 

such nominating committee shall 

evaluate nominees for serving as 

directors and evaluate the independence 

of nominees and directors. 

(2) A majority of the directors serving 

on the nominating committee must be 

independent directors, and the chair of 

the nominating committee must be an 

independent director. 

(3) The fitness standards for serving as 

a director shall be specified by the 

nominating committee, documented in 

writing, and approved by the board of 

directors. Such fitness standards must 

be consistent with the requirements of 

this section and include that the 

individual is not subject to any statutory 

disqualification as defined under 

Section 3(a)(39) of the Act. 

(4) The nominating committee must 

document the outcome of the written 

evaluation process consistent with the 

fitness standards required under 

paragraph (c)(3) of this section. Such 

process shall: 

(i) Take into account each nominee’s 

expertise, availability, and integrity, and 

demonstrate that the board of directors, 

taken as a whole, has a diversity of 

skills, knowledge, experience, and 

perspectives; 

(ii) Demonstrate that the nominating 

committee has considered whether a 

particular nominee would complement 

the other board members, such that, if 

elected, the board of directors, taken as 

a whole, would represent the views of 

the owners and participants, including 

a selection of directors that reflects the 

range of different business strategies, 

models, and sizes across participants, as 

well as the range of customers and 

clients the participants serve; 

(iii) Demonstrate that the nominating 

committee considered the views of other 

stakeholders who may be affected by the 

decisions of the registered clearing 

agency, including transfer agents, 

settlement banks, nostro agents, 

liquidity providers, technology or other 

service providers; and 

(iv) Identify whether each nominee or 

director would meet the definition of 

independent director in paragraphs (a) 

and (f) of this section, and whether each 

such nominee or director has a known 

material relationship with the registered 

clearing agency or any affiliate thereof, 

an owner, a participant, or a 

representative of another stakeholder of 

the registered clearing agency described 

in paragraph (c)(4)(iii) of this section. 

(d) Risk management committee. (1) 

Each registered clearing agency must 

establish a risk management committee 

(or committees) of the board to assist the 

board of directors in overseeing the risk 

management of the registered clearing 

agency. The membership of each risk 

management committee must be reevaluated annually and at all times 

include representatives from the owners 

and participants of the registered 

clearing agency. 

(2) In the performance of its duties, 

the risk management committee must be 

able to provide a risk-based, 

independent, and informed opinion on 

all matters presented to the committee 

for consideration in a manner that 

supports the overall risk management, 

safety and efficiency of the registered 

clearing agency. 

(e) Committees generally. If any 

committee has the authority to act on 

behalf of the board of directors, the 

composition of that committee must 

have at least the same percentage of 

independent directors as is required for 

the board of directors, as set forth in 

paragraph (b)(1) of this section. 

(f) Circumstances that preclude 

directors from being independent 

directors. In addition to how the 

definition of independent director set 

forth in this section is applied by a 

registered clearing agency, the following 

circumstances preclude a director from 

being an independent director, subject 

to a lookback period of one year 

(counting back from making the initial 

determination in paragraph (b)(2) of this 

section) applying to paragraphs (f)(2) 

through (6) of this section: 

(1) The director is subject to rules, 

policies, or procedures by the registered 

clearing agency that may undermine the 

director’s ability to operate unimpeded, 

such as removal by less than a majority 

vote of shares that are entitled to vote 

in such director’s election; 

(2) The director, or a family member, 

has an employment relationship with or 

otherwise receives compensation other 

than as a director from the registered 

clearing agency or any affiliate thereof, 

or the holder of a controlling voting 

interest of the registered clearing 

agency; 

(3) The director, or a family member, 

is receiving payments from the 

registered clearing agency, or any 

affiliate thereof, or the holder of a 

controlling voting interest of the 

registered clearing agency, that 

reasonably could affect the independent 

judgment or decision-making of the 

director, other than the following: 

(i) Compensation for services as a 

director on the board of directors or a 

committee thereof; or 

(ii) Pension and other forms of 

deferred compensation for prior services 

not contingent on continued service; 

(4) The director, or a family member, 

is a partner in, or controlling 

shareholder of, any organization to or 

from which the registered clearing 

agency, or any affiliate thereof, or the 

holder of a controlling voting interest of 

the registered clearing agency, is making 

or receiving payments for property or 

services, other than the following: 

(i) Payments arising solely from 

investments in the securities of the 

registered clearing agency, or affiliate 

thereof; or 

(ii) Payments under non-discretionary 

charitable contribution matching 

programs; 

(5) The director, or a family member, 

is employed as an executive officer of 

another entity where any executive 

officers of the registered clearing agency 

serve on that entity’s compensation 

committee; or 

(6) The director, or a family member, 

is a partner of the outside auditor of the 

registered clearing agency, or any 

affiliate thereof, or an employee of the 

outside auditor who is working on the 

audit of the registered clearing agency, 

or any affiliate thereof. 

(g) Conflicts of interest. Each 

registered clearing agency must 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to: 

(1) Identify and document existing or 

potential conflicts of interest in the 

decision-making process of the clearing 

agency involving directors or senior 

managers of the registered clearing 

agency; and 

(2) Mitigate or eliminate and 

document the mitigation or elimination 

of such conflicts of interest. 

(h) Obligation of directors to report 

conflicts. Each registered clearing 

agency must establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

require a director to document and 

inform the registered clearing agency 

promptly of the existence of any 

relationship or interest that reasonably 

could affect the independent judgment 

or decision-making of the director. 

(i) Management of risks from 

relationships with service providers for 

core services. Each registered clearing 

agency must establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to: 

(1) Require senior management to 

evaluate and document the risks related 

to an agreement with a service provider 


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for core services, including under 

changes to circumstances and potential 

disruptions, and whether the risks can 

be managed in a manner consistent with 

the clearing agency’s risk management 

framework; 

(2) Require senior management to

submit to the board of directors for 

review and approval any agreement that 

would establish a relationship with a 

service provider for core services, along 

with the risk evaluation required in 

paragraph (i)(1) of this section; 

(3) Require senior management to be

responsible for establishing the policies 

and procedures that govern 

relationships and manage risks related 

to such agreements with service 

providers for core services and require 

the board of directors to be responsible 

for reviewing and approving such 

policies and procedures; and 

(4) Require senior management to

perform ongoing monitoring of the 

relationship, and report to the board of 

directors for its evaluation of any action 

taken by senior management to remedy 

significant deterioration in performance 

or address changing risks or material 

issues identified through such 

monitoring; or if the risks or issues 

cannot be remedied, require senior 

management to assess and document 

weaknesses or deficiencies in the 

relationship with the service provider 

for submission to the board of directors. 

(j) Obligation of board of directors to

solicit and consider viewpoints of 

participants and other relevant 

stakeholders. Each registered clearing 

agency must establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

require the board of directors to solicit, 

consider, and document its 

consideration of the views of 

participants and other relevant 

stakeholders of the registered clearing 

agency regarding material developments 

in its risk management and operations 

on a recurring basis. 

By the Commission. 

Dated: November 16, 2023. 

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–25807 Filed 12–4–23; 8:45 am] 

BILLING CODE 8011–01–P 


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