63732 Federal Register / Vol. 75, No. 200 / Monday, October 18, 2010 / Proposed Rules 

1See Dodd-Frank Act, Pub. L. 111–203, 124 Stat. 

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

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

OTCDERIVATIVES/index.htm. 2Pursuant to Section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 3 7 U.S.C. 1 et seq. 4 In this release, the terms ‘‘swap dealer’’ and 

‘‘major swap participant’’ shall have the meanings 

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

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

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

directs the Commission to promulgate rules to 

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

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

in the process of this rulemaking. See, e.g., 

http://www.cftc.gov/LawRegulation/ 

OTCDerivatives/OTC_2_Definitions.html. The 

Commission anticipates that such rulemaking will 

be completed by the statutory deadline of July 15, 

2011. 

5See the following colloquy between 

Representative Stephen Lynch and Representative 

Barney Frank on the language that became Section 

726 of the Dodd-Frank Act: 

Madam Speaker, for the purpose of a colloquy, I 

would like to engage with the chairman of the 

committee and the drafter of this legislation. I 

congratulate him on the great work he has done on 

this reform bill. 

Mr. Chairman, I want to call your attention to 

sections 726 and 765 of the bill. These two 

provisions require the CFTC and the SEC to 

conduct rulemakings to eliminate the conflicts of 

interest arising from the control of clearing and 

trading facilities by entities such as swap dealers 

and major swap participants. 

This problem arises because, right now, 95 

percent of all of the clearinghouses in this country 

are owned by just five banks. So, while we are 

relying on the clearinghouses to reduce systemic 

risk, we have the banks now owning the 

clearinghouses. 

The question I have is regarding the intent of the 

conferees in retaining subsection B of these 

provisions. It could be loosely construed to leave 

it up to the agencies whether or not to adopt rules. 

Mr. Chairman, do you agree that my reading of 

sections 726 and 765 affirmatively require these 

agencies to adopt strong conflict of interest rules on 

control and governance of clearing and trading 

facilities? 

Mr. FRANK of Massachusetts. If the gentleman 

would yield to me, he has been a leader in this 

important area, and he is a careful lawyer and 

understands that just saving a principle isn’t 

enough. You’ve got to make sure it is carried out. 

Dealing with a conflict of interest that he has been 

a leader in identifying is essential if this is going 

to work. So I completely agree with him. Yes, we 

mean both of those subsections, and it is a 

mandatory rulemaking. 

I will say to my neighbor from Massachusetts that 

we will be monitoring this carefully. They can 

expect oversight hearings because, yes, this is 

definitely a mandate to them to adopt rules to deal 

with what would be a blatant conflict of interest in 

the efficacy rules, and we intend to follow that 

closely. 

156 Cong. Rec. H5217 (2010). 

6The ‘‘enumerated entities’’ include: (i) Bank 

holding companies with over $50,000,000,000 in 

total consolidated assets; (ii) a nonbank financial 

company supervised by the Board of Governors of 

the Federal Reserve System; (iii) an affiliate of (i) 

or (ii); (iv) a swap dealer; (v) a major swap 

participant; or (vi) an associated person of (iv) or 

(v). 

37°42′30′′ N., long. 112°55′00′′ W., to lat. 

37°43′00′′ N., long. 112°43′00′′ W., thence to 

the point of beginning. 

Issued in Seattle, Washington, on October 

6, 2010. 

John Warner, 

Manager, Operations Support Group, Western 

Service Center. 

[FR Doc. 2010–26096 Filed 10–15–10; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

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

RIN 3038–AD01 

Requirements for Derivatives Clearing 

Organizations, Designated Contract 

Markets, and Swap Execution Facilities 

Regarding the Mitigation of Conflicts 

of Interest 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (the 

‘‘Commission’’) hereby proposes rules to 

implement new statutory provisions 

enacted by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the ‘‘Dodd-Frank Act’’). 

Specifically, the proposed rules 

contained herein impose new 

requirements on derivatives clearing 

organizations (‘‘DCOs’’), designated 

contract markets (‘‘DCMs’’), and swap 

execution facilities (‘‘SEFs’’) with 

respect to mitigation of conflicts of 

interest. 

DATES: Submit comments on or before 

November 17, 2010. 

ADDRESSES: You may submit comments, 

identified by RIN number, by any of the 

following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web Site: http:// 

www.cftc.gov. Follow the instructions 

for submitting comments on the Web 

site. 

• E-mail: 

dcodcmsefGovernance@cftc.gov. 

• Fax: 202–418–5521. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

FOR FURTHER INFORMATION CONTACT: 

Nancy Liao Schnabel, Special Counsel, 

Division of Clearing and Intermediary 

Oversight (DCIO), at 202–418–5344 or 

nschnabel@cftc.gov; Lois Gregory, 

Assistant Deputy Director for Market 

Review, the Division of Market 

Oversight (DMO), at 202–418–5569 or 

lgregory@cftc.gov; Andrea Musalem, 

Special Counsel, DCIO, at 202–418– 

5167 or amusalem@cftc.gov; Jordan 

O’Regan, Attorney-Advisor, DCIO, at 

202–418–5984 or joregan@cftc.gov; 

Cody Alvarez, Attorney-Advisor, DMO, 

at 202–418–5404 or calvarez@cftc.gov; 

Dana Brown, Law Clerk, DMO, at 202– 

418–5093 or dbrown@cftc.gov; Jolanta 

Sterbenz, Counsel, Office of the General 

Counsel, at 202–418–6639 or 

jsterbenz@cftc.gov; David Reiffen, 

Senior Economist, Office of the Chief 

Economist, at 202–418–5602 or 

dreiffen@cftc.gov; or Alicia Lewis, 

Attorney-Advisor, DCIO, at 202–418– 

5862 or alewis@cftc.gov; in each case, 

also at the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.1 Title VII of 

the Dodd-Frank Act 2 amended the 

Commodity Exchange Act (‘‘CEA’’) 3 to 

establish a comprehensive new 

regulatory framework for swaps and 

certain security-based swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (i) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; 4

(ii) imposing mandatory clearing and 

trade execution requirements on 

clearable swap contracts; (iii) creating 

robust recordkeeping and real-time 

reporting regimes; and (iv) enhancing 

the rulemaking and enforcement 

authorities of the Commission with 

respect to, among others, all registered 

entities and intermediaries subject to 

the oversight of the Commission. 

In order to ensure the proper 

implementation of the comprehensive 

new regulatory framework, especially 

with respect to (ii) above, the DoddFrank Act requires 5 the Commission to 

promulgate rules to mitigate conflicts of 

interest in the operation of certain 

DCOs, DCMs, and SEFs. First, Section 

726(a) of the Dodd-Frank Act 

specifically empowers the Commission 

to adopt ‘‘numerical limits * * * on 

control’’ or ‘‘voting rights’’ that 

enumerated entities 6 may hold with 

respect to such DCOs, DCMs, and SEFs. 

Second, Section 726(b) of the DoddFrank Act directs the Commission to 

determine the manner in which its rules 

may be deemed necessary or 


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7 In adopting rules to implement Section 726 of 

the Dodd-Frank Act, the Commission is also 

implementing Section 725(d) of the Dodd-Frank 

Act. The latter states: ‘‘[t]he Commodity Futures 

Trading Commission shall adopt rules mitigating 

conflicts of interest in connection with the conduct 

of business by a swap dealer or a major swap 

participant with a derivatives clearing organization, 

board of trade, or a swap execution facility that 

clears or trades swaps in which the swap dealer or 

major swap participant has a material debt or 

material equity investment.’’ 

8Although the Commission is proposing the rules 

contained herein to specifically carry out Section 

726 of the Dodd-Frank Act (as well as Section 

725(d) of the Dodd-Frank Act), the Commission 

notes that it has additional authority to propose 

such rules under Sections 735(b), 735(c), and 733 

of the Dodd-Frank Act. See infra note 17 for a more 

extensive description of Sections 735(b), 735(c), and 

733 of the Dodd-Frank Act. 

9The Commission requests comment as to 

whether DCOs, like DCMs and SEFs, have (or 

potentially may have) other conflicts of interest that 

implicate the balance between advancement of 

commercial interests and fulfillment of selfregulatory responsibilities. 

10Commission regulations (the ‘‘Regulations’’) 

referred to herein are found at 17 CFR Ch. 1. 11See, generally, ‘‘Conflicts of Interest in SelfRegulation and Self-Regulatory Organizations,’’ 74 

FR 18982 (April 27, 2009) (which defined ‘‘public 

director’’); 72 FR 6936 (Feb. 14, 2007) (which 

adopted final acceptable practices for the DCM core 

principle) (the ‘‘DCM Conflicts of Interest Release’’); 

71 FR 38740 (July 7, 2006) (which proposed 

acceptable practices for the DCM core principle). 

Currently, DCM core principle 15 addresses 

conflicts of interest. See 7 U.S.C. 7(d)(15). The 

Dodd-Frank Act has redesignated DCM core 

principle 15 as DCM core principle 16, but has left 

the actual language of the principle substantively 

unchanged. 

12Section 765 of the Dodd-Frank Act requires the 

SEC to promulgate rules to mitigate conflicts of 

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

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

swap execution facility, or (iii) a national securities 

exchange that posts or makes available for trading 

security-based swaps. 

13The transcript from the roundtable (the 

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

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

documents/file/derivative9sub082010.pdf. 

14Such comments are available at: http:// 

www.cftc.gov/LawRegulation/DoddFrankAct/ 

OTC_9_DCOGovernance.html. 

15Currently, the Commission regulates certain 

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

LCH.Clearnet Limited and ICE Clear Europe 

Limited (‘‘ICE Clear Europe’’), each of which is 

based in the United Kingdom). 

16COM(2010) 484/5. 

appropriate to improve the governance 

of certain DCOs, DCMs, or SEFs or to 

mitigate systemic risk, promote 

competition, or mitigate conflicts of 

interest in connection with the 

interaction between swap dealers and 

major swap participants, on the one 

hand, and such DCOs, DCMs, and SEFs. 

Finally, Section 726(c) of the DoddFrank Act directs the Commission to 

consider the manner in which its rules 

address conflicts of interest in the 

abovementioned interaction arising 

from equity ownership, voting structure, 

or other governance arrangements of the 

relevant DCOs, DCMs, and SEFs. The 

Commission must complete a 

rulemaking under Section 726 of the 

Dodd-Frank Act within 180 days after 

enactment—i.e., by January 14, 2011.7

In carrying out Section 726 of the 

Dodd-Frank Act,8 the Commission 

identifies in Section II below the 

following potential conflicts of interest: 

• Conflicts of interest that a DCO may 

confront when determining (i) whether 

a swap contract is capable of being 

cleared, (ii) the minimum criteria that 

an entity must meet in order to become 

a swap clearing member, and (iii) 

whether a particular entity satisfies such 

criteria; 9 and 

• Conflicts of interest that a DCM or 

SEF may confront in balancing 

advancement of commercial interests 

and fulfillment of self-regulatory 

responsibilities. 

The Commission proposes in Section III 

below (i) structural governance 

requirements and (ii) limits on the 

ownership of voting equity and the 

exercise of voting power, and describes, 

in each case, the manner in which such 

proposals may mitigate conflicts of 

interest in the operation of a DCO, DCM, 

or SEF.10

In general, the proposed rules include 

strengthened versions of the acceptable 

practices that the Commission 

previously adopted for the DCM core 

principle on conflicts of interest.11 The 

proposed rules impose structural 

governance requirements and limits on 

the ownership of voting equity and the 

exercise of voting power. They impose 

specific composition requirements on 

DCO, DCM, or SEF Boards of Directors 

and require each DCO, DCM, or SEF to 

have a nominating committee and one 

or more disciplinary panels. Each DCO 

must have a risk management 

committee and each DCM or SEF must 

have a regulatory oversight committee 

and a membership or participation 

committee, subject to specific 

composition requirements. 

The proposed rules limit DCM or SEF 

members (and related persons) from 

beneficially owning more than twenty 

(20) percent of any class of voting equity 

in the registered entity or from directly 

or indirectly voting an interest 

exceeding twenty (20) percent of the 

voting power of any class of equity 

interest in the registered entity. With 

respect to a DCO only, the proposed 

rules require a DCO to choose one of 

two alternative limits on the ownership 

of voting equity or the exercise of voting 

power. Under the first alternative, no 

individual member may beneficially 

own more than twenty (20) percent of 

any class of voting equity in the DCO or 

directly or indirectly vote an interest 

exceeding twenty (20) percent of the 

voting power of any class of equity 

interest in the DCO. In addition, the 

enumerated entities, whether or not 

they are DCO members, may not 

collectively own on a beneficial basis 

more than forty (40) percent of any class 

of voting equity in a DCO, or directly or 

indirectly vote an interest exceeding 

forty (40) percent of the voting power of 

any class of equity interest in the DCO. 

Under the second alternative, no DCO 

member or enumerated entity, 

regardless of whether it is a DCO 

member, may own more than five (5) 

percent of any class of voting equity in 

the DCO or directly or indirectly vote an 

interest exceeding five (5) percent of the 

voting power of any class of equity 

interest in the DCO. 

Notwithstanding the foregoing, the 

proposed rules recognize that 

circumstances may exist where neither 

alternative would be appropriate for a 

DCO. Consequently, the proposed rules 

provide a procedure for the DCO to 

apply for, and the Commission to grant, 

a waiver of the limits specified in the 

first and second alternative. 

The proposed rules reflect 

consultation with staff of the following 

agencies: (i) The Securities and 

Exchange Commission (the ‘‘SEC’’); 12 (ii) 

the Board of Governors of the Federal 

Reserve, (iii) the Office of the 

Comptroller of the Currency; (iv) the 

Federal Deposit Insurance Corporation; 

and (v) the Treasury Department. Staff 

from each of these agencies has 

provided verbal and/or written 

comments, and the proposed rules 

incorporate elements of the comments 

provided. The proposed rules have been 

further informed by (i) the joint 

roundtable that Commission and SEC 

staff conducted on August 20, 2010 (the 

‘‘Roundtable’’) 13 and (ii) public 

comments posted to the Web site of the 

Commission.14 Finally, mindful of the 

importance of international 

harmonization,15 the proposed rules 

incorporate certain elements of: (i) The 

Proposal for a Regulation of the 

European Parliament and of the Council 

on OTC Derivatives, Central 

Counterparties, and Trade Depositories 

(the ‘‘European Commission 

Proposal’’); 16 and (ii) the latest draft of 

the Principles for Financial Market 

Infrastructures, which would ultimately 

be reviewed by the Committee on 

Payment and Settlement Systems of the 

Bank for International Settlements and 

the Technical Committee of the 


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17Such rulemaking would implement Sections 

735(b) and 725(c) of the Dodd-Frank Act, which 

amends Sections 5(d) and 5b(c) of the CEA to add 

new core principles, or to supplement existing core 

principles, regarding the governance of DCMs and 

DCOs, and the mitigation of conflicts of interest in 

the operation of such entities. Such core principles 

would apply to all DCMs and DCOs, regardless of 

whether they clear or list swap contracts or only 

commodity futures or options. Such rulemaking 

would also implement Section 733 of the DoddFrank Act, which inserts new Section 5h of the CEA 

to create a registration category for SEFs, and to 

impose core principles that include the mitigation 

of conflicts of interest. The Commission is 

considering the proposals set forth below, among 

others, with respect to the second rulemaking: (1) 

Requiring each DCO, DCM, or SEF to have a 

regulatory program to (i) identify, on an ongoing 

basis, existing and potential conflicts of interest, 

and (ii) to make decisions in the event of such 

conflict; (2) mandating that each DCO, DCM, or SEF 

(i) prescribe limits on use of non-public 

information, and (ii) afford transparency with 

respect to governance arrangements; (3) requiring 

each DCO, DCM, or SEF to report to the 

Commission whenever (i) the Board of Directors 

rejects a recommendation or supersedes an action 

of the DCM or SEF Regulatory Oversight 

Committee, DCM or SEF Membership or 

Participation Committee, or DCO Risk Management 

Committee, as applicable, or (ii) the DCO Risk 

Management Committee rejects or supersedes an 

action of the DCO Risk Management Subcommittee, 

if applicable; (4) mandating minimum governance 

fitness standards for DCO and DCM members and 

participants; and (5) prescribing minimum 

standards regarding (i) DCM consideration of 

market participant views and (ii) the diversity of 

DCM Board of Directors, if the DCM is publiclylisted. 

18According to the DCM Conflicts of Interest 

Release, ‘‘[t]he presence of potentially conflicting 

demands within a single entity—regulatory 

authority coupled with commercial incentives to 

misuse such authority—constitutes the new 

structural conflict of interest addressed by the 

acceptable practices adopted herein.’’ 72 FR at 6937. 

19The CME Group, Inc. (the ‘‘CME Group’’), a 

publicly-listed corporation, wholly owns the 

Chicago Mercantile Exchange, Inc. (‘‘CME’’). 

However, CME Clearing House, a division of CME, 

has a Risk Committee that is composed of: (i) Two 

members of the CME Board of Directors; (ii) five 

clearing member representatives; and (iii) two 

additional individuals, one of whom cannot be a 

clearing member representative. See CME Rule 

403.A, available at: http://www.cmegroup.com/ 

rulebook/CME/I/4/03.html. 

20See Section 3(b) of the CEA, 7 U.S.C. 5(b). 

21See, e.g., Darrel Duffie, Ada Li, Theo Lubke, 

‘‘Policy Perspectives on OTC Derivatives Market 

Infrastructure,’’ Federal Reserve Bank of New York 

Staff Report No. 424, dated January 2010, as revised 

March 2010 (the ‘‘FRBNY Staff Report’’). According 

to Section II of the FRBNY Staff Report, ‘‘[a]n overthe-counter trade is privately negotiated between 

the buyer and seller.’’ According to Section VII(A)(i) 

of the FRBNY Staff Report, ‘‘[o]nly some types of 

OTC derivatives are now cleared. These include, for 

example, certain actively traded credit derivatives, 

some common forms of interest-rate swaps, and 

some energy derivatives. Of these ‘eligible’ types of 

OTC derivatives, those for which clearing has been 

set up, not all positions are actually cleared; the 

decision of which positions to clear has to this 

point been left to the discretion of market 

participants.’’ 

22See, e.g., Comments from James Hill, Managing 

Director and Global Credit Derivatives Officer, 

Morgan Stanley, representing the Securities 

Industry and Financial Markets Association (‘‘Hill’’) 

(‘‘I think there’s a bit of a misconception that 

somehow clearing makes trades less profitable. 

That’s clearly not the case. In fact, I think most of 

the large systemically important participants in this 

market prefer clearing. And I think that’s not just 

a statement; there is significant anecdotal evidence 

to support that perhaps the most important of 

which is LCH’’), Roundtable Tr. at 21–22. 

International Organization of Securities 

Commissions. 

The Commission anticipates 

conducting at least one other 

rulemaking that may impose 

requirements on DCOs, DCMs, and SEFs 

with respect to governance and 

mitigation of conflicts of interest.17 The 

Commission expects to finish such 

rulemaking by the statutory deadline of 

July 15, 2011. 

The Commission requests comment 

on all aspects of this release. 

II. Conflicts of Interest 

As mentioned above, Title VII of the 

Dodd-Frank Act amended the CEA to 

establish a comprehensive new 

framework for swaps and security-based 

swaps. This framework imposes 

mandatory clearing and trade execution 

requirements with respect to clearable 

swap contracts. Some market 

participants, investor advocates, and 

academics have expressed a concern 

that the enumerated entities have 

economic incentives to minimize the 

number of swap contracts subject to 

mandatory clearing and trading. They 

contend that control of a DCO by the 

enumerated entities, whether through 

ownership or otherwise, constitutes the 

primary means for keeping swap 

contracts out of the mandatory clearing 

requirement, and therefore also out of 

the trading requirement. The 

Commission addresses these arguments 

below. The Commission also examines 

the contention that sustained 

competition between DCMs or SEFs 

with respect to the same swap contracts 

may exacerbate certain structural 

conflicts of interest, as the DCM 

Conflicts of Interest Release defines 

such term.18

a. DCOs 

In general, in the commodity futures 

and options markets, the DCM decides 

which contracts to list, whereas the 

DCO manages the risk of guaranteeing 

such contracts. Clearing members 

exercise significant control over the 

manner in which a DCO manages risk, 

whether the members own the DCO or 

not.19 Based on Commission experience, 

such control has generally permitted the 

DCO to serve the purposes of the CEA, 

especially with respect to ‘‘ensur[ing] 

the financial integrity of all transactions 

subject to [the CEA] and the avoidance 

of systemic risk.’’ 20 Clearing members 

contribute substantial financial 

resources to the DCO default or 

guarantee fund. If a clearing member 

defaults, and the DCO holds insufficient 

performance bond from such member to 

cover its losses, then the DCO would 

access the default or guarantee fund. 

Thus, the DCO spreads its losses across 

all clearing members. This mechanism 

creates an incentive for each clearing 

member to ensure that (i) other clearing 

members meet certain financial 

requirements and (ii) the DCO adopt a 

conservative approach towards risk 

management, especially in determining 

whether a particular contract would be 

acceptable for clearing. 

This same mechanism also creates a 

disincentive for clearing members to act 

collectively (i) to exclude other entities 

from becoming clearing members or (ii) 

to bar a DCO from accepting new 

commodity futures or options contracts. 

After all, each new clearing member 

must contribute to the default or 

guarantee fund. Such contribution 

would result in a pro rata decrease in 

the potential exposure of each other 

clearing member to a default. Moreover, 

clearing members generally had little 

incentive to prevent the DCO from 

accepting a particular contract, absent a 

risk-based objection. In fact, the more 

different types of contracts that a DCO 

accepts, the more the intermediation 

services that such clearing member 

offers would likely be in demand. 

The regulated market structure that 

the Dodd-Frank Act contemplates for 

swap contracts is, in many ways, the 

mirror image of the market structure for 

commodity futures and option 

contracts. Currently, most swap 

contracts are privately negotiated 

between two parties, and are generally 

not cleared.21 Section 723 of the DoddFrank Act requires: (i) Swap contracts 

meeting certain criteria to be cleared 

with a DCO; and (ii) such contracts to 

be executed on a DCM or SEF (unless 

no DCM or SEF lists such contracts). 

Therefore, a DCO has unprecedented 

influence over the manner in which a 

swap contract can be executed. 

Certain market participants and 

academics believe that Section 723 of 

the Dodd-Frank Act does not introduce 

any new incentives for clearing 

members to act collectively (i) to 

exclude other entities from becoming 

clearing members or (ii) to bar a DCO 

from accepting new contracts. First, 

they argue that clearing does not make 

a bilateral swap contract less 

profitable.22 Second, they contend that, 

because clearing does not impact the 

profitability of a bilateral swap contract, 

swap clearing members that are 


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23See, e.g., Comments from Hill (‘‘as a general 

rule, the clearing member needs to be able to absorb 

losses, a default by another clearing member, 

number one; and, number two, they need to be able 

to absorb the economic transaction risk in the 

portfolio of a defaulting member * * * And so the 

way these clearinghouses set up their risk, you 

know, their admission or their membership criteria, 

is both of those things. So, A, they have to have a 

capital base sufficient to absorb losses and add in 

more capital to the clearinghouse if a member 

defaults. And B, they have to be able to in a 

situation where a clearing member has defaulted, 

which is probably the time of most economic stress, 

you know, in the economy, be able to take down 

the economic transaction risk of the swaps that 

were otherwise, the defaulting member was 

otherwise a party to, those trades need to be 

allocated among the surviving clearing members 

* * * And so the way these clearinghouses 

developed their criteria is they look at both of those 

prongs and they set thresholds to make sure that the 

members who are admitted can do those things. 

Because, remember, if you admit a member who 

can’t do both of those things, then what happens 

is the clearinghouse will have insufficient capital in 

a situation where a member has defaulted, which 

is the time of the highest economic stress’’), 

Roundtable Tr. at 28 to 29. 

24See, e.g., Comments from Hill (‘‘In evaluating 

what trades should be cleared, there’s a balance that 

needs to be struck between the goal of increasing 

clearing, obviously, but, B, you don’t want to put 

trades in the clearinghouse that can’t be 

appropriately risk-managed. So if you put trades in 

the clearinghouse that are illiquid and can’t be 

valued properly, what will happen is when a 

clearing member defaults, there will be insufficient 

collateral with respect to that trade because it 

wasn’t properly valued in the clearinghouse, and 

the surviving clearing members will be stressed 

from an economic perspective in taking positions 

the value of which cannot be readily ascertained. 

So it’s critical that only trades that can be 

appropriately risk-managed be put into the 

clearinghouse. And I think what you’ll see is that 

most of the clearinghouses look to their clearing 

members to help them valuate which trades are 

appropriate from a clearing perspective, and that is 

completely consistent with the economic incentives 

because the clearing members are the ones who 

have the overwhelming preponderance of the 

capital in the clearinghouse. So it’s their capital 

that’s at risk. They should certainly have a say in 

helping the clearinghouse evaluate which trades are 

acceptable for clearing and which trades are too 

risky or can’t be valued, or are too illiquid or not 

standardized and, therefore, shouldn’t be cleared’’), 

Roundtable Tr. at 43 to 45. 

25 Id. See, also, e.g., Comments from Lee Olesky, 

Chief Executive Officer and Co-Founder, TradeWeb 

(‘‘Olesky’’) (‘‘And I second Mr. Hill’s comments. I 

think that it’s very important that the people who 

bear the risk and supply the capital should have a 

substantial voice in how that risk gets managed, and 

that includes what contracts are accepted for 

clearing’’), Roundtable Tr. at 46. 

26For example, according to the Office of the 

Comptroller of the Currency (‘‘OCC’’), as of the 

second quarter of 2009, U.S. commercial banks held 

derivatives with $203.5 trillion in notional value. 

Of that $203.5 trillion, the top five commercial 

banks held approximately $197 trillion. The top 

five commercial banks were: (i) JPMorgan Chase 

Bank N.A.; (ii) Goldman Sachs Bank USA; (iii) Bank 

of America N.A.; (iv) Citibank N.A.; and (v) Wells 

Fargo Bank N.A. The sixth commercial bank, 

holding approximately $3 trillion, was HSBC Bank 

USA N.A. See OCC’s Quarterly Report on Bank 

Trading and Derivatives Activities, Second Quarter 

2009. 

27 Id. (stating that ‘‘U.S. commercial banks 

reported revenues of $5.2 billion trading cash and 

derivative instruments in the second quarter of 

2009, compared to a record $9.8 billion in the first 

quarter’’). 

28According to Section VI of the FRBNY Staff 

Report, ‘‘[e]ven after an OTC derivatives product has 

achieved relatively active trading, and would be 

suitable for exchange trading, dealers have an 

incentive to maintain the wider bid-ask spreads that 

they can obtain in the OTC market relative to the 

spreads that might apply to the same product on an 

exchange, where buyers and sellers can more 

directly compete for the same trade. Further, 

exchanges are more likely to match ultimate buyers 

to sellers, reducing the fraction of trades 

intermediated by dealers. Thus, from the viewpoint 

of their profits, dealers may prefer to reduce the 

migration of derivatives trading from the OTC 

market to central exchanges.’’ 

29See, e.g., Comments of Heather Slavkin, Senior 

Legal and Policy Advisor, Office of Investment, 

AFL–CIO (‘‘Slavkin’’) (‘‘If there’s an interest among 

the people who own the clearinghouse, or a conflict 

of interest that would create incentives for them to 

also favor, you know, [not] allowing certain types 

of swaps to clear because they may be more 

profitable for the institution generally if they 

remain over the counter, then that can create 

perverse incentives to maintain the OTC, 

nontransparent, systemically risky markets when 

the goal needs to be to prevent those conflicts of 

interest to ensure that anything that can be cleared 

does, in fact, clear’’), Roundtable Tr. at 21; 

Comments of Darrell Duffie, Dean Witter 

Distinguished Professor of Finance at the Graduate 

School of Business, Stanford University (‘‘Duffie’’) 

(‘‘We talked earlier about how the members of the 

clearinghouse should determine what gets traded, 

and we also have conflicts of interest arising from 

the incentives of the dealers to profit from bid 

versus ask on products that are not traded on swap 

execution facilities. So the interaction effect here is 

effectively if one gets cleared as one gets traded on 

a swap execution facility, then we want to be very 

careful that the members of a central clearing 

counterparty that determine what gets cleared and, 

therefore, have control over what gets traded on 

swap execution facilities are the members that have, 

you know, the right social incentives to create 

competition’’); Comments of Michael Greenberger, 

Professor, University of Maryland School of Law 

(‘‘Greenberger’’) (‘‘If you have one clearinghouse 

dominated by the major swaps dealers, they have 

several conflicting incentives. One is, I reject the 

idea that somehow they do not want to keep a large 

and vibrant over-the-counter market. We’re told that 

clearing is very profitable. If it was that profitable, 

where were these people when we were 

aggressively arguing for mandatory clearing and 

exchange trading? They were on the opposite side 

of that. The transaction fees and the spreads still 

make an unregulated market very, very profitable, 

probably more profitable than the profits that would 

derive from clearing. So, if you have the swaps 

dealers in control of a clearing facility, they have 

that incentive’’), Roundtable Tr. at 111. 

30For example, as of July 2, 2010, ICE Clear 

Europe cleared approximately $3.3 trillion in 

European credit default swap (‘‘CDS’’) indices and 

an additional $501 billion in European CDS singlename instruments. See ‘‘ICE Surpasses $10 Trillion 

Milestone in Global CDS Clearing,’’ available at: 

http://ir.theice.com/ 

releasedetail.cfm?ReleaseID=485527. 

As of September 20, 2010, all CDS clearing 

members of ICE Clear Europe are banks, bank 

holding companies, or affiliates thereof. Such 

members are: (i) Banc of America N.A.; (ii) Barclays 

Bank PLC; (iii) BNP Paribas; (iv) Citigroup Global 

Markets Limited; (v) Credit Suisse International; (vi) 

Deutsche Bank AG; (vii) Goldman Sachs 

International; (viii) HSBC Bank PLC; (ix) JPMorgan 

Chase Bank, N.A.; (x) Morgan Stanley Capital 

Services, Inc.; (xi) Nomura International PLC; (xii) 

Socie ́te ́ Ge ́ne ́rale; (xiii) The Royal Bank of Scotland 

PLC; (xiv) UBS AG, London Branch; and (xv) 

UniCredit Bank AG. See ICE Clear Europe, Clearing 

Members, available at: https://www.theice.com/ 

publicdocs/clear_europe/ 

ICE_Clear_Europe_Clearing_Member_List.pdf, and 

the release updating such list, available at https://

www.theice.com/publicdocs/clear_europe/ 

circulars/C10080.pdf. 

ICE Trust U.S. LLC (‘‘ICE Trust’’), an affiliate of 

ICE Clear Europe, cleared approximately $6 billion 

in North American CDS indices and $272 billion in 

North American single-name indices. The CDS 

clearing members of ICE Clear Europe and ICE Trust 

generally overlap (counting affiliated entities), 

except that Merrill Lynch International is a clearing 

member of ICE Trust and Socie ́te ́ Ge ́ne ́rale and 

UniCredit Bank AG are not. See ICE Trust, 

Participant List, available at: https://

www.theice.com/publicdocs/ice_trust/ 

ICE_Trust_Participant_List.pdf. ICE Trust is 

currently not a DCO. 

31See note 29 above. See, also, Comments from 

Slavkin (‘‘I think that there’s the risk that anything 

that could be made to appear to be something that 

is a bilateral * * * contract, you could have the 

spurious customization issues, if there’s the 

opportunity to get additional profits within the big 

dealer banks, and those same dealer banks are 

Continued 

enumerated entities have specific, riskbased justifications for (i) setting 

membership criteria that exclude certain 

entities 23 and (ii) determining that 

certain swap contracts cannot be 

cleared.24 Third, they assert that such 

swap clearing members must have the 

right to cause the DCO to act on such 

justifications, since ultimately, the 

capital of such clearing members (i.e., 

their contributions to the default or 

guarantee fund) may be accessed if a 

fellow clearing member defaults.25

Others do not agree. They maintain 

that certain enumerated entities are 

active in the over-the-counter swap 

markets 26 and that they earn significant 

revenues from this line of business.27

Such entities may experience 

substantial decreases in revenues if 

swap contracts were required to be (i) 

cleared with a DCO and (ii) executed on 

a DCM or SEF.28 Therefore, some 

contend that such entities may have an 

incentive to represent that certain swap 

contracts do not meet the mandatory 

clearing criteria under Section 723 of 

the Dodd-Frank Act.29 Such swap 

contracts would also not be subject to 

the trading requirement under Section 

723 of the Dodd-Frank Act. 

Although Section 723 of the DoddFrank Act grants the Commission 

ultimate authority to determine whether 

a swap contract must be cleared with a 

DCO, it also anticipates that the 

Commission would consider the risk 

assessment of DCOs. Currently, DCOs 

that clear large volumes of swap 

contracts tend to have swap clearing 

members that consist exclusively of 

enumerated entities.30 Therefore, some 

argue that the risk assessment of such 

DCOs may be compromised.31


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running and controlling the clearinghouses, then, 

you know, the potential for spurious customization 

becomes a real issue and becomes a possibility’’), 

Roundtable Tr. at 40. 

In addition to noting that the enumerated entities 

may have incentives to influence DCO risk 

assessments in favor of considering fewer contracts 

to be suitable for mandatory clearing, certain 

academics have observed that, for those contracts 

that nonetheless are cleared, the enumerated 

entities may have incentives to lower risk 

management standards. See, e.g., Comments from 

Greenberger (‘‘* * * yes, certain products will be 

cleared because they are profitable and [the 

enumerated entities] may over calculate and be over 

enthused about clearing things that are too risky’’), 

Roundtable Tr. at 112. For example, the enumerated 

entities may not accurately calculate the amount of 

performance bond and/or guarantee or default fund 

contributions necessary to clear a particular swap 

contract. 

32See, e.g., Comments from Jason Kastner, Vice 

Chairman, Swaps and Derivatives Markets 

(‘‘Kastner’’) (‘‘Let me give you a specific example. 

One of the members of this SDMA currently clears 

13 percent of the business at a large exchange in 

Chicago. That large, independent FCM is clearly 

qualified to become a swap clearing member. But 

because of various conflicts of interest, the risk 

committee of said exchange is precluding that firm, 

which is clearly qualified and has the capital, from 

becoming a swap clearing member * * * this goes 

back to the governance point and transparency 

about who’s making that decision and why, because 

a lot of times what happens is people will swallow 

themselves in the cloak of risk management or 

financial stability or whatever really to make an 

anti-competitive stand. In other words, you can 

never say that you don’t want to let somebody in. 

But you could probably find an excuse or a reason 

in the interest of systematic—you know, systemic 

stability and the rest of it to put an asterisk on the 

application or just delay it for awhile’’), Roundtable 

Tr. at 90–91. 

See, also, infra note 67 on the potential nonavailability of arrangements whereby a non-clearing 

futures commission merchant may present a 

customer trade to a swap clearing member for 

clearing with a DCO. 

33 In Lessening Systemic Risk: Removing Final 

Hurdles to Clearing OTC Derivatives, the Swaps and 

Derivatives Market Association states: ‘‘[r]estricted 

access leads to reduced clearing which leads to 

systemic risk.’’ 

34See, e.g., the letter from Senators Christopher 

Dodd and Blanche Lincoln, respective chairs of the 

Senate Banking and Agriculture Committee, to 

Representatives Barney Frank and Collin Peterson, 

respective chairs of the House Financial Services 

and Agriculture Committees, dated June 30, 2010 

(stating that ‘‘Congress determined that clearing is 

at the heart of reform—bringing transactions and 

counterparties into a robust, conservative and 

transparent risk management framework’’). 

35Certain Roundtable participants agree. See 

Comments from Duffie (‘‘I don’t think there’s a 

conflict between the incentives for competition, 

increasing competition in this market on the one 

hand and the incentives for improving financial 

stability on the other, or I don’t think there’s a 

problem between those two. You can * * * have 

both. The incentives to watch for on competition 

are that we’ve got enough access by multiple market 

* * * participants, and that the oligopolistic nature 

of the market is, to some extent, watched carefully 

by regulators’’), Roundtable Tr. at 104. 

36Section 3(a) of the CEA defines the ‘‘national 

public interest’’ that transactions in commodity 

futures and options and swaps serve. It states, ‘‘[t]he 

transactions subject to this Act are entered into 

regularly in interstate and international commerce 

and are affected with a national public interest by 

providing a means for managing and assuming price 

risks, discovering prices, or disseminating pricing 

information through trading in liquid, fair and 

financially secure trading facilities.’’ 7 U.S.C. 5(a). 

The importance of transactions in commodity 

futures and options, as well as swaps, forms the 

basis for Commission regulation of DCMs and SEFs. 

Section 3(b) of the CEA describes the system of 

regulation that Congress has directed the 

Commission to implement to achieve the 

abovementioned purposes. It states: ‘‘[i]t is the 

purpose of this chapter to serve the public interests 

* * * through a system of effective self-regulation 

of trading facilities, clearing systems, market 

participants and market professionals under the 

oversight of the Commission.’’ 7 U.S.C. 5(a). The 

Commission has interpreted the ‘‘self-regulation’’ 

referenced in Section 3(b) of the CEA as 

encompassing both (i) the registered entity ensuring 

that members meet applicable statutory 

requirements, and (ii) the registered entity having 

systems to ensure that it continues to meet 

applicable statutory requirements. For example, as 

the Commission previously stated in the DCM 

Conflicts of Interest Release, ‘‘Core Principle 15 

requires DCMs to maintain systems to minimize 

structural conflicts of interest inherent in selfregulation, as well as individual conflicts of interest 

faced by particular persons. The acceptable 

practices are rationally related to the purposes of 

Core Principle 15.’’ 72 FR at 6937, 6940. 

37As mentioned above, the SEF is a new 

registration category that the Dodd-Frank Act 

created. Therefore, the Commission has never 

opined as to whether a SEF is a ‘‘self-regulatory 

organization’’ within the meaning of Regulation 

1.3(ee). However, a SEF has self-regulatory 

obligations under the Dodd-Frank Act, as the 

Commission has interpreted such obligations in the 

DCM Conflicts of Interest Release. For example, to 

the extent that a SEF determines that it must 

impose requirements on members in order to 

comport with a core principle (e.g., with respect to 

position limits), a SEF must monitor member 

compliance with such requirement, and must have 

the authority and ability to enforce such 

requirement. See Section 5h(f)(2)(A) of the CEA, as 

added by Section 733 of the Dodd-Frank Act. 

38Preamble to proposed acceptable practices on 

‘‘Conflicts of Interest in Self-Regulation and SelfRegulatory Organizations,’’ 71 FR 38740, 38741 

(July 7, 2006). 

39See, generally, the DCM Conflicts of Interest 

Release. 

40See, infra note 67 for a specific example of 

DCM or SEF restrictions or burdens on access. Also, 

clauses (i) and (ii) are not mutually exclusive. As 

the DCM Conflicts of Interest Release notes, ‘‘[s]elfregulation’s traditional conflict—that members will 

fail to police their peers with sufficient zeal—has 

been joined by the possibility that competing DCMs 

could abuse their regulatory authority to gain 

competitive advantage or to satisfy commercial 

imperatives.’’ 72 FR at 6938. In its Concept Release 

Concerning Self-Regulation, the SEC identified one 

method that national securities exchanges have 

used to gain a competitive advantage: ‘‘abus[ing] 

Moreover, some contend that the swap 

clearing members of such DCOs may 

exclude non-enumerated entities from 

becoming clearing members, because 

non-enumerated entities may influence 

risk assessments of DCOs in favor of 

clearing more swap contracts.32 Some 

market participants maintain that such 

practices may have systemic 

implications.33

The framers of the Dodd-Frank Act 

observe that the clearing of swap 

contracts constitutes a key means for 

managing systemic risk, because 

clearing removes the type of 

interconnectedness between financial 

institutions that contributed to the 

financial crisis resulting from the failure 

and bankruptcy of firms such as Bear 

Stearns, Lehman Brothers, and AIG.34

Therefore, it is important to mitigate 

potential conflicts of interest that may 

prevent clearable swap contracts from 

becoming subject to mandatory clearing. 

At the same time, the Commission 

recognizes that the safety and soundness 

of a DCO should not be compromised. 

A DCO must not only have the ability 

to appropriately manage the risk 

associated with each and every contract 

that it guarantees, it must be able to 

decline accepting contracts for clearing 

if they pose unacceptable risks. In 

addition, DCO members must have 

input in setting membership criteria, 

because they bear the risk of loss in the 

event of member default. Nevertheless, 

the Commission does not believe that (i) 

subjecting more swap contracts to 

mandatory clearing is incompatible with 

(ii) DCO safety and soundness.35 Rather, 

the Commission intends to ensure, 

through the proposed rules below, that 

a DCO takes action to achieve both (i) 

and (ii), and that the private, 

competitive interests of certain DCO 

members do not capture DCO risk 

assessments. 

b. DCMs and SEFs 

The main function of a DCM, as well 

as a SEF, is to provide a facility for: (i) 

The discovery of prices; and (ii) the 

execution of transactions. However, in 

order to obtain and maintain a license 

to perform such a function, each DCM 

and SEF must fulfill self-regulatory 

obligations under the CEA and the 

Dodd-Frank Act.36 Therefore, although 

each DCM or SEF 37 is a commercial 

enterprise, the fact that each entity has 

self-regulatory obligations means that 

each entity ‘‘is not simply a corporation, 

but a corporation charged with the 

public trust.’’ 38 Section 3(b) of the CEA 

confers on the Commission the 

responsibility for ensuring that each 

DCM or SEF appropriately prioritizes its 

self-regulatory obligations. Such 

obligations include appropriately 

implementing the comprehensive new 

framework that the Dodd-Frank Act sets 

forth, as well as meeting existing 

requirements under the CEA. 

As the DCM Conflicts of Interest 

Release notes, increased competition 

may exacerbate conflicts of interest, 

causing a DCM to (i) prioritize 

commercial interests over selfregulatory responsibilities; 39 and (ii) 

restrict access or impose burdens on 

access in a discriminatory manner.40


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SRO status by overregulating members that operate 

markets that compete with the SROs.’’ Release No. 

34–50700 (Nov. 18, 2004), 69 FR 71256 (Dec. 8, 

2004). 

Also, similar to the incentives that the 

enumerated entities may have with respect to the 

mandatory clearing requirement, if the enumerated 

entities control a DCM or SEF, they may cause such 

DCM or SEF to not list a swap contract for trading, 

if it would be more profitable to keep such contract 

bilaterally negotiated. However, the Commission 

notes that nothing would prevent another DCM or 

SEF from listing such contract, and that Section 723 

of the Dodd-Frank Act would require that a DCO 

clearing such contract provide non-discriminatory 

access to such DCM or SEF. 

41See Section 2(h)(8) of the CEA, as added by 

Section 723 of the Dodd-Frank Act. 

42See Section 2(h)(1)(B) of the CEA, as added by 

Section 733 of the Dodd-Frank Act. Whereas DCMs 

have competed in the past, and are currently 

competing, to list commodity futures and options 

contracts with the same economic terms and 

conditions, such contracts have not been, and 

currently are not, fungible. In other words, such 

contracts cannot be offset in the same DCO. 

43See Section 2(h)(8) of the CEA, as added by 

Section 723 of the Dodd-Frank Act. 

44For example, two DCMs (i.e., the NASDAQ 

OMX Futures Exchange and CME), as well as one 

exempt board of trade (i.e., Eris Exchange), offer 

interest rate futures products. Currently, interest 

rate swap contracts constitute a large percentage of 

the bilateral swaps market. See, e.g., OCC’s 

Quarterly Report on Bank Trading and Derivatives 

Activities, First Quarter 2010, Executive Summary, 

available at: http://www.occ.treas.gov/ftp/release/ 

2010-71a.pdf. (stating that ‘‘[d]erivative contracts 

remain concentrated in interest rate products, 

which comprise 84% of total derivative notional 

values’’). 

45As discussed above, whether such competition 

occurs depends in part on the manner in which 

Section 723 of the Dodd-Frank Act is implemented. 

46Namely, (i) prioritizing commercial interests 

over self-regulatory responsibilities and (ii) 

restricting access or imposing burdens on access in 

a discriminatory manner, in each case, because of 

increased competition. 

47 7 U.S.C. 6d. 

48See, e.g., the DCM Conflicts of Interest Release 

(stating that ‘‘the public interest will be furthered 

if the boards and executive committees of all DCMs 

Continued 

The Dodd-Frank Act attempts to create 

conditions favorable to sustained 

competition between DCMs and SEFs 

with respect to the same swap contract. 

For example, the Dodd-Frank Act 

contemplates that either a DCM or a SEF 

may list swap contracts.41 It also 

contemplates that multiple DCMs or 

SEFs may list the same swap contract, 

and that such swap contracts may be 

offset at the same DCO.42 Also, in 

requiring certain swap contracts to be 

listed on a DCM or SEF,43 the DoddFrank Act may encourage competition 

between standardized swap contracts 

and commodity futures and options.44

Such sustained competition, if it 

occurs,45 would constitute an increase 

to the competition that most DCMs 

currently face with respect to 

commodity futures and options. As 

described below, the Commission 

intends to ensure through the proposed 

rules that each DCM or SEF implements 

appropriate systems to manage such 

conflicts. 

c. Questions on Conflicts of Interest 

The Commission seeks comment on 

the questions set forth below on 

potential conflicts of interest. 

• Has the release correctly identified 

the conflicts of interest that a DCO, 

DCM, or SEF may confront? 

• Has the release accurately specified 

the possible effects of such conflicts of 

interest on DCO, DCM, or SEF 

operations? What are other possible 

effects? 

• What other conflicts of interest may 

exist? What are the effects of such 

conflicts? 

III. Mitigation of Conflicts of Interest 

To mitigate, on a prophylactic basis, 

the conflicts of interest identified above, 

the Commission sets forth below 

proposed (i) structural governance 

requirements and (ii) limits on the 

ownership of voting equity and the 

exercise of voting power. As explained 

in greater detail below, the Commission 

views (ii) as a method of enhancing (i), 

in that (ii) limits the influence that 

certain shareholders may exert over the 

DCO, DCM, or SEF Board of Directors. 

The Commission believes that such 

influence may affect, among other 

things, the independent perspective of 

public directors. The Commission does 

not believe that stricter structural 

governance requirements (e.g., a higher 

percentage of public directors) justify 

more lenient limits on the ownership of 

voting equity and the exercise of voting 

power, or vice versa. However, the 

Commission requests comment on the 

proper relationship between such 

requirements and limits. The 

Commission also requests comment on 

whether both (i) structural governance 

requirements and (ii) limits on the 

ownership of voting equity and the 

exercise of voting power are necessary 

or appropriate to mitigate the conflicts 

of interest described in Section II, or 

whether one or the other (or neither) 

would be effective. 

In applying such requirements and 

limits, the Commission does not 

propose to distinguish between DCMs 

and SEFs listing swap contracts. As 

mentioned above, such DCMs and SEFs 

may experience sustained competition 

with respect to the same swap contract, 

and therefore would face the same 

pressures on self-regulation. 

Additionally, the Commission does not 

propose to distinguish between (i) 

DCMs listing swap contracts and (ii) 

DCMs listing only commodity futures 

and options. As mentioned above, 

clearable swap contracts may share 

sufficiently similar characteristics with 

certain commodity futures and options 

as to compete with respect to execution. 

Therefore, a DCM listing only 

commodity futures and options may 

face competition from a SEF with fewer 

self-regulatory requirements, in the 

same manner as a DCM listing swap 

contracts. Given that the same conflicts 

of interest 46 may concern both types of 

DCM, it would appear that the same (i) 

structural governance requirements and 

(ii) limits on the ownership of voting 

equity and the exercise of voting power 

should apply. 

In addition, the Commission does not 

propose to distinguish between (i) DCOs 

clearing swap contracts and (ii) DCOs 

clearing only commodity futures and 

options. Certain standardized swap 

contracts have sufficiently similar risk 

profiles to commodity futures and 

options that the Commission has, on 

occasion, permitted such products to be 

commingled and margined within the 

segregated customer account under 

Section 4d of the CEA.47 If the 

Commission applied differential (i) 

structural governance requirements and 

(ii) limits on the ownership of voting 

equity and the exercise of voting power, 

the Commission risks creating an 

incentive for regulatory arbitrage 

between the two types of DCO. 

The Commission requests comment 

on holding the two types of (i) DCMs 

and (ii) DCOs to the same requirements 

regarding the mitigation of conflicts of 

interest. The Commission also requests 

comment on holding DCMs and SEFs 

listing swap contracts to the same 

requirements. The Commission is 

specifically interested in the costs and 

benefits of its approach. 

a. Structural Governance Requirements 

i. Independence 

In general, the structural governance 

requirements mitigate conflicts of 

interest at a DCO, DCM, or SEF by 

introducing a perspective independent 

of competitive, commercial, or industry 

considerations to the deliberations of 

governing bodies (i.e., the Board of 

Directors and committees). Such 

independent perspective would more 

likely encompass regulatory 

considerations, and to accord such 

considerations proper weight. Such 

independent perspective also would 

more likely contemplate the manner in 

which a decision might affect all 

constituencies, as opposed to 

concentrating on the manner in which 

a decision affects the interests of one 

constituency.48


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are at least 35% public. Such boards and 

committees will gain an independent perspective 

that is best provided by directors with no current 

industry ties or other relationships which may pose 

a conflict of interest. These public directors, 

representing over one-third of their boards, will 

approach their responsibilities without the 

conflicting demands faced by industry insiders. 

They will be free to consider both the needs of the 

DCM and of its regulatory mission, and may best 

appreciate the manner in which vigorous, impartial, 

and effective self-regulation will serve the interests 

of the DCM and the public at large. Furthermore, 

boards of directors that are at least 35% public will 

help to promote widespread confidence in the 

integrity of U.S. futures markets and selfregulation’’). 72 FR 6946. 

49See, e.g., Comment from Hal Scott, Nomura 

Professor of International Financial Systems and 

Director of Program on International Financial 

Systems, Harvard Law School (‘‘Scott’’) (‘‘When I 

spoke, I was saying I opposed ownership 

restrictions, I was not talking about voting 

restrictions which I think is a different issue, and 

the way I would put it is not a voting restriction. 

I would turn it around to a duty of fair 

representation, which the SEC is quite familiar 

with, and is applied to their regulated entities 

which ensures that the users, more broadly defined 

of the exchange. And maybe if you translated this 

into the clearinghouse, the users, but not 

necessarily the members of the clearinghouse, 

would have representation in terms of governance 

* * * Independent directors, to me, are most 

needed with public companies as under SOX when 

there was a broad duty to shareholders. But I think 

what’s needed in this context is more the expert, 

and we heard before that it’s very important that 

people that know what they’re doing have input 

into those, and clearly major users of these 

clearinghouses, that is customers who clear through 

a member. Major hedge funds, for instance, have a 

lot of expertise, okay, in these areas, they’re big 

traders * * *’’), Roundtable Tr. at 130–131; Richard 

Prager, Managing Director, Global Head of Fixed 

Income Trading, Blackrock (‘‘as the [sole] fiduciary 

on this panel * * * we would be in support of a 

very inclusive participation and governance with 

teeth’’), Roundtable Tr. at 131–132; Lynn Martin, 

Chief Operating Officer, NYSE Liffe U.S. (‘‘You may 

be aware that NYSE Euronext’s U.S. Future 

Exchange—NYSE Life U.S., is a semi-neutralized 

structure whereby we balance the views of both the 

independence criteria as required by core principle 

15 in the CFTC–DCM requirements, as well as the 

views of NYSE Euronext and our external investor 

firms’ views, such that no one board action may be 

enacted based on the views of any one of those 

constituents * * * So, it’s our belief that a more 

balanced board structure, a more balanced 

governance structure, is the proper way to handle 

or potentially mitigate conflicts of interest’’), 

Roundtable Tr. at 121. 

50 72 FR at 6940. 

51See Section III(a)(iv) of this release for more 

detail regarding the definition of ‘‘public director.’’ 

The Commission notes that such percentage 

harmonizes with Article 25(2) of the European 

Commission Proposal, which requires a central 

counterparty (‘‘CCP’’) to have ‘‘a board of which at 

least one third, but no less than two, of its members 

are independent.’’ 

52 72 FR at 6946. 

53See Article 25(2) of the European Commission 

Proposal. 

54The proposed rule defines ‘‘operate’’ as ‘‘the 

direct exercise of control (including through the 

exercise of veto power) over the day-to-day business 

operations of’’ a DCO, DCM, or SEF ‘‘by the sole or 

majority shareholder of such registered entity, 

either through the ownership of voting equity, by 

contract, or otherwise. The term ‘operate’ shall not 

prohibit an entity, acting as the sole or majority 

shareholder of such registered entity, from 

exercising its rights as a shareholder under any 

contract, agreement, or other legal obligation.’’ 

In the DCM Conflicts of Interest 

Release, the Commission emphasized 

the importance of independent 

decision-makers in protecting DCM selfregulatory functions from DCM 

commercial interests and that of its 

constituencies. However, the 

Commission notes that participants in 

the Roundtable raised the possibility 

that conflicts of interest may also be 

mitigated by providing for fair 

representation of all constituencies in 

the governance of a DCO, DCM, or 

SEF.49 Theoretically, all constituencies 

would act in their own commercial, 

competitive, or industry interests, but 

no one interest would dominate. The 

Commission specifically requests 

comment regarding whether fair 

representation would be preferable to, 

or would complement, director 

independence in mitigating the DCO, 

DCM, and SEF conflicts of interest 

described in Section II. The Commission 

would particularly welcome factual 

examples. The Commission also 

requests comment on how the proposed 

structural governance requirements 

should change if the Commission adopts 

a fair representation standard as either 

an alternative to, or a complement of, 

rules emphasizing an independent 

perspective. 

ii. Board Requirements 

1. Composition 

As the DCM Conflicts of Interest 

Release states, ‘‘the governing board 

* * * is [the] ultimate decision maker 

and therefore the logical place to begin 

to address conflicts.’’ 50 The Commission 

proposes (i) maintaining the 

requirement that DCM Boards of 

Directors be composed of at least 35 

percent ‘‘public directors’’ 51 and (ii) 

extending this requirement to SEF and 

DCO Boards of Directors. In the DCM 

Conflicts of Interest Release, the 

Commission stated that the 35 percent 

requirement struck an appropriate 

balance between (i) the need to 

minimize conflicts of interest in DCM 

decision-making processes with (ii) the 

need for expertise and efficiency in such 

processes. Such rationale would appear 

to apply to SEF and DCO Boards of 

Directors as well.52

In addition to the 35 percent 

composition requirement, the 

Commission proposes specifying that 

DCO, DCM, and SEF Boards of Directors 

may not have less than two public 

directors. Such a requirement is also 

contained in the European Commission 

Proposal.53 As the Commission has 

observed that most DCO and DCM 

Boards of Directors contain more than 

three members, the Commission does 

not believe that such a requirement 

imposes additional burden. However, 

the Commission welcomes comment on 

this proposal. 

In order to prevent evasion of the 

abovementioned composition 

requirements through corporate 

structuring or internal reorganization, 

the Commission proposes extending the 

composition requirements to any 

committee of the Board of Directors that 

may exercise delegated authority with 

respect to the management of a DCO, 

DCM, or SEF. Further, the Commission 

proposes prohibiting a DCO, DCM, or 

SEF from permitting itself to be 

operated 54 by another entity, unless 

such entity agrees to comport with such 

requirements in the same manner as the 

DCO, DCM, or SEF. 

The Commission would like to clarify 

that it does not intend to extend the 

abovementioned composition 

requirements to an entity that does not 

exert active and recurrent control over 

the operations of a DCO, DCM, or SEF. 

Consequently, the Commission proposes 

to deem an entity to ‘‘operate’’ a DCO, 

DCM, or SEF only if it engages in ‘‘the 

direct exercise of control (including 

through the exercise of veto power) over 

the day-to-day business operations’’ of 

the registered entity. 

In addition to the abovementioned 

composition requirements, the 

Commission proposes prohibiting a 

DCO, DCM, or SEF from permitting 

itself to be operated by an entity unless 

such entity agrees to subject (i) its 

officers, directors, employees, and 

agents to Commission authority, and (ii) 

its books and records to Commission 

inspection and copying. The 

Commission believes that such 

proposals are necessary to ensure 

effective audits of DCO, DCM, or SEF 

operations, given the corporate structure 

of the DCO, DCM, or SEF. 

2. Questions on Composition 

The Commission seeks comment on 

the questions set forth below on DCO, 

DCM, and SEF Boards of Directors 

composition requirements: 

• Would such composition 

requirements be equally valid in 

mitigating conflicts of interest 

concerning a privately-held DCO, DCM, 

and SEF, as opposed to a publicly-held 

DCO, DCM, and SEF? 

• As mentioned above, would 

providing for fair representation on 

DCO, DCM, or SEF Boards of Directors 

be preferable to, or complementary to, 

mandating specific percentages of 


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55See, e.g., Comments from Slavkin (‘‘I think 

having real experts on the boards of directors is a 

very important issue. We all saw situations in the 

last several years where there were boards that were 

two-thirds independent and made really stupid 

decisions about risk management. So, we need to 

make sure that there are people on those boards of 

directors that really understand the risks that exist 

within a clearinghouse and are prepared to perceive 

potential risks that may arise in the system down 

the road and address them. So they also need to 

have the personalities to stand up to a board of 

directors that may be entrenched and have their 

own interests that may differ from those that are in 

the best interests of the systemic stability’’), 

Roundtable Tr. at 77; Comments from Johnathan 

Short, Senior Vice President, General Counsel and 

Corporate Secretary, the IntercontinentalExchange, 

Inc. (‘‘I mean, she’s right, but I just want to point 

out that there really is a tension there, because some 

of the people who are best qualified to assess risk 

in a given market are the people that some parts of 

the—you know, of the market are complaining 

about is controlling clearinghouses and controlling 

key infrastructure’’), Roundtable Tr. at 78; 

Comments from William H. Navin, Executive Vice 

President and General Counsel, Options Clearing 

Corporation (‘‘I would second those remarks. Our 

experience has been that we’ve benefited greatly 

from the expertise of industry directors, and I think 

it would be throwing the baby out with the 

bathwater if substantial restrictions on industry 

governance were to be enacted’’), Roundtable Tr. at 

78; Comments from Greenberger (‘‘I do agree with 

what has been said, that you need experts on the 

board. What I disagree with is that all expertise 

comes from five swaps dealers or it all comes from 

people who work for banks. There are academics, 

former regulators, and, you know, other participants 

in the market who have talked today about their 

need for open and fair access. I think that kind of 

diversity on the board is important’’), Roundtable 

Tr. at 164. 

56See Article 25 of the European Commission 

Proposal. 

57See, e.g., Comments from Rick McVey, Chief 

Executive Officer, MarketAxess (‘‘McVey’’) (‘‘I 

personally think that one of the most important 

areas to focus on is the governance and nominating 

committee. How do people get on these boards? 

Continued 

public directors? Also, if the main 

purpose of the 35 percent composition 

requirement is to introduce an 

independent perspective into DCO, 

DCM, and SEF governance, would 

requiring one or two public directors be 

sufficient, regardless of the size of the 

DCO, DCM, or SEF Board of Directors? 

• As mentioned above, the 

Commission is seeking to mitigate 

potential conflicts of interest that may 

influence a DCO regarding (i) whether a 

swap contract is capable of being 

cleared, (ii) the minimum criteria that 

an entity must meet in order to become 

a swap clearing member, and (iii) 

whether a particular entity satisfies such 

criteria. Because the DCO Board of 

Directors would make ultimate 

decisions implicating (i), (ii), and (iii), is 

the 35 percent composition requirement 

sufficient to ensure that the private, 

competitive interests of certain DCO 

members do not capture DCO risk 

assessments with respect to both 

products and membership? Or should 

the Commission increase the required 

percentage of public directors to 51 

percent? Or is there a number less than 

51 percent but greater than 35 percent 

that would be more appropriate? 

• As described above, the Dodd-Frank 

Act envisions (i) a DCM competing with 

a SEF to list the same swap contract, 

and (ii) a DCM listing a commodity 

futures or options contract that 

competes with a swap contract listed on 

a SEF. In both cases, a DCM would be 

competing against an entity with lesser 

self-regulatory obligations. Such 

competition may place increased stress 

on the manner in which the DCM aims 

to satisfy its self-regulatory 

responsibilities. In light of such stress, 

is the 35 percent composition 

requirement still sufficient to protect the 

DCM self-regulatory function? 

• As referenced above, the DoddFrank Act anticipates that a SEF would 

face a more competitive environment at 

inception than a DCM currently listing 

commodity futures and options. As the 

DCM Conflicts of Interest Release notes, 

increased competition may be 

detrimental to self-regulation. Therefore, 

is the 35 percent composition 

requirement appropriate to ensure that a 

SEF discharges its self-regulatory 

functions in the first instance? 

3. Substantive Requirements 

In addition to the abovementioned 

composition requirements, the 

Commission proposes the substantive 

requirements set forth below, which aim 

to enhance the accountability of the 

DCO, DCM, or SEF Board of Directors to 

the Commission regarding the manner 

in which such Board of Directors causes 

the DCO, DCM, or SEF to discharge all 

statutory, regulatory, or self-regulatory 

responsibilities under the Dodd-Frank 

Act and the existing CEA. 

• The roles and responsibilities of a 

DCO, DCM, or SEF Board of Directors 

must be clearly articulated, especially in 

respect of the manner in which such 

Board of Directors ensures that the DCO, 

DCM, or SEF complies with all 

statutory, regulatory, and self-regulatory 

responsibilities under the Dodd-Frank 

Act and the existing CEA. 

• A DCO, DCM, or SEF Board of 

Directors shall review its performance 

and that of its individual members 

annually. It should consider 

periodically using external faciliators 

for such reviews. 

• A DCO, DCM, or SEF must have 

procedures to remove a member from 

the Board of Directors, where the 

conduct of such member is likely to be 

prejudicial to the sound and prudent 

management of the DCO, DCM, or SEF. 

Because of the highly specialized 

nature of DCO, DCM, or SEF operation, 

the Commission proposes requiring that 

each member of a DCO, DCM, or SEF 

Board of Directors have sufficient 

expertise, where applicable, in financial 

services, risk management, and clearing 

services. Roundtable participants 

generally agreed that a DCO, DCM, or 

SEF Board of Directors must have 

sufficient expertise.55

To ensure that members of a DCO, 

DCM, or SEF Board of Directors are not 

incented to accord undue consideration 

to the commercial interests of a DCO, 

DCM, or SEF in relation to regulatory 

interests, the Commission proposes to 

prohibit linking the compensation of 

public directors and other nonexecutive members of the Board of 

Directors to the business performance of 

the DCO, DCM, or SEF. 

The abovementioned substantive 

requirements are in accord with certain 

provisions in the European Commission 

Proposal.56

4. Questions on Substantive 

Requirements 

The Commission seeks comment on 

the questions set forth below on the 

substantive requirements applicable to a 

DCO, DCM, or SEF Board of Directors: 

• What substantive requirements, 

other than those identified above, 

should the Commission consider 

imposing on a DCO, DCM, or SEF Board 

of Directors to mitigate the potential 

conflicts of interest described in Section 

II, as well as any potential conflicts of 

interest not specified herein? For 

example, should the Commission 

consider any additional requirements 

related to (i) the fiduciary duties that a 

DCO, DCM, or SEF Board of Directors 

may owe or (ii) policies or charters that 

the DCO, DCM, or SEF Board of 

Directors may adopt? 

iii. Committees 

1. Requirements for Each DCO, DCM, 

and SEF 

a. Nominating Committee 

As stated above, the structural 

governance requirements contained 

herein focus on mitigating conflicts of 

interest through introducing a 

perspective independent of competitive, 

commercial, or industry considerations 

to the deliberations of DCO, DCM, and 

SEF governing bodies. Public director 

composition requirements are not, in 

and of themselves, sufficient to ensure 

the representation of such independent 

perspective. The Commission also must 

protect the integrity of the process by 

which the DCO, DCM, or SEF selects 

public directors.57


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And if there is a requirement that that process be 

independent I think you would get both qualified 

people that are going to look after the best interest 

of the company, and you would get better 

independence on these boards’’), Roundtable Tr. at 

150. 

58For example, to the extent that a DCO 

determines that it must impose requirements on 

members in order to comport with a core principle 

or other regulatory requirement (e.g., limits on 

ownership and voting power), a DCO must monitor 

member compliance with such requirement, and 

must have the authority and ability to enforce such 

requirement. See Section 5b(c)(2)(H) of the CEA, as 

added by Section 725(c) of the Dodd-Frank Act. 

59The Commission understands that DCOs 

currently may not have disciplinary panels, but that 

the Risk Management Committee of a DCO may 

perform the functions of such panel. Therefore, 

consistent with current practice, the Commission 

proposes to permit the DCO Board of Directors to 

delegate to the Risk Management Committee the 

performance of such functions. If the Board of 

Directors so delegates, (i) the DCO would no longer 

need to maintain a disciplinary panel, but (ii) the 

composition requirements applicable to a 

disciplinary panel would be extended to any 

committee (or similar body) to which a decision of 

the Risk Management Committee may be appealed. 

60See 72 FR at 6952 (stating that ‘‘fair disciplinary 

procedures, with minimal conflicts of interest, 

require disciplinary bodies that represent a 

diversity of perspectives and experiences’’). 

61 Id. (stating that ‘‘[t]he presence of at least one 

public person on disciplinary bodies * * * 

provides an outside voice and helps to ensure that 

the public’s interests are represented and protected. 

This approach is consistent with the Commission’s 

overall objective of ensuring an appropriate level of 

public representation at every level of DCM 

decision making, while simultaneously calibrating 

the required number of public persons to the nature 

and responsibility of the decision-making body in 

question’’). 

62 Id. at 6957. In the proposed rules, a ‘‘Public 

Participant’’ is defined as an entity that meets the 

bright-line materiality tests in the definition of 

‘‘Public Director.’’ 

63See Comments from Greenberger, supra note 

55, regarding the availability of such public 

directors. 

64See, generally, supra note 55. 

Because customers do not contribute to the DCO 

default fund, customers may have less capital at 

stake than clearing members if a DCO improperly 

measures risk. Therefore, the Commission believes 

that 10 percent representation would ensure that 

customers have adequate voice on the DCO Risk 

Management Committee, without adversely 

impacting the risk assessments of such committee. 

To this end, the Commission proposes 

requiring each DCO, DCM, or SEF to 

have a Nominating Committee. The role 

of the Nominating Committee would be 

to: (i) Identify individuals qualified to 

serve on the Board of Directors, 

consistent with the criteria that the 

Board of Directors require and any 

composition requirement that the 

Commission promulgates; and (ii) 

administer a process for the nomination 

of individuals to the Board of Directors. 

The Commission proposes that (i) 

public directors comprise at least 51 

percent of the Nominating Committee, 

and (ii) a public director chair the 

Nominating Committee. 

b. Disciplinary Panels 

As stated above, each DCM and SEF 

must fulfill self-regulatory obligations 

under the CEA and the Dodd-Frank Act. 

Also, each DCO has certain selfregulatory obligations.58 The 

Commission proposes requiring each 

DCO, DCM, or SEF to have one or more 

disciplinary panels.59 The role of such 

disciplinary panels would be to conduct 

hearings, render decisions, and impose 

sanctions with respect to disciplinary 

matters. 

The Commission believes that it is 

imperative for each DCO, DCM, or SEF 

to exercise its disciplinary authority in 

an impartial manner. In the DCM 

Conflicts of Interest Release, the 

Commission acknowledged the value of 

fair representation in maintaining such 

impartiality.60 To ensure that fair 

representation results in impartiality, 

the Commission proposes (i) 

maintaining the requirement that each 

DCM adopt rules that would preclude 

any group or class of participants from 

dominating or exercising 

disproportionate influence on the 

disciplinary panel, and (ii) extending 

such requirement to each DCO or SEF. 

The Commission also proposes 

mandating that each DCO, DCM, or SEF 

adopt rules that would prohibit any 

member of a disciplinary panel from 

participating in deliberations or voting 

on any matter in which the member 

knowingly has a financial interest. 

In the DCM Conflicts of Interest 

Release, the Commission also 

acknowledged the importance of an 

independent perspective.61 The 

Commission proposes retaining and 

strengthening the role that such 

perspective plays in DCO, DCM, or SEF 

disciplinary processes. First, the 

Commission proposes (i) maintaining 

the requirement that each DCM 

disciplinary panel include at least one 

‘‘public participant,’’ 62 and (ii) 

extending such requirement to each 

DCO or SEF disciplinary panel. Second, 

the Commission proposes requiring that 

the chair of each disciplinary panel be 

a public participant. 

2. Requirements for Each DCO Only 

a. Risk Management Committee (and 

Subcommittee) 

The central purpose of a DCO is to 

guarantee the performance of each 

derivatives contract that it clears. In 

order to fulfill such guarantee, each 

DCO must appropriately manage the 

risks associated with such contract. In 

general, a DCO convokes a committee to 

oversee risk management. The 

Commission proposes to require each 

DCO to have a Risk Management 

Committee. 

Swap contracts, as well as commodity 

futures and options, are complex 

instruments. Managing the risks of such 

instruments requires expertise. In 

general, clearing members constitute the 

main source of such expertise, as they 

(i) routinely execute trades in such 

instruments and (ii) have experience in 

managing risks posed by customer 

trades. Because of the lack of a 

centralized market for swap contracts, 

swap clearing members also perform the 

function of (i) pricing a swap contract 

and (ii) participating in an auction to 

liquidate the swap contract in the event 

of member default. 

However, as discussed above, swap 

clearing members at DCOs that currently 

clear large volumes of swap contracts 

are exclusively enumerated entities. 

Some have argued that the enumerated 

entities have an incentive to influence 

DCO risk assessments regarding (i) 

whether a swap contract is capable of 

being cleared, (ii) the appropriate 

membership criteria for a swap clearing 

member, and (iii) whether a particular 

entity meets such criteria. Therefore, the 

Commission must carefully consider the 

composition of the Risk Management 

Committee, in order to achieve (i) the 

increased clearing of swap contracts that 

the Dodd-Frank Act contemplates 

without compromising (ii) DCO safety 

and soundness. 

The Commission proposes a threepronged approach to mitigating the 

potential conflict of interest identified 

above, while still ensuring that the Risk 

Management Committee retains 

sufficient expertise. First, the 

Commission proposes requiring that 35 

percent of the Risk Management 

Committee be composed of public 

directors, with sufficient expertise in, 

among other things, clearing services.63

Second, the Commission proposes 

requiring that 10 percent of the Risk 

Management Committee be composed of 

customers of clearing members, who 

also routinely execute swap contracts 

(as well as commodity futures and 

options) and who have experience in 

using pricing models for such contracts 

(if only to ensure that they receive a fair 

price from the enumerated entities).64

Because customers benefit from a wider 

pool of swap clearing members and 

greater competition between such 

members, customers have an incentive 

to ensure that the membership criteria 

of a DCO are risk-based, and do not 

reflect the private, competitive interests 

of the enumerated entities. Third, the 

Commission proposes to permit a DCO 

Risk Management Committee to delegate 

to a subcommittee (the ‘‘Risk 


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65The Commission is contemplating requiring the 

DCO to report to the Commission whenever the 

Risk Management Committee overrules the Risk 

Management Subcommittee, or whenever the Board 

of Directors overrules the Risk Management 

Committee. If the Commission decides to propose 

such requirement, it would be included in the 

second rulemaking that the Commission 

contemplates finishing on governance and 

mitigation of conflicts of interest. See supra note 17. 

66 I.e., any decision pertaining to (i) whether a 

swap contract is capable of being cleared, (ii) the 

appropriate membership criteria for a swap clearing 

member, and (iii) whether a particular entity meets 

such criteria. 

67See, e.g., Comments from Kastner (‘‘I’ll take the 

ball for a second with the SEFs. The same 

principles that apply to DCOs in terms of open 

access—also if you carefully apply to SEFs, 

anybody who is able to get a clearing account at a 

qualified swap clearing member or FCM to use the, 

you know, futures analog, anybody that wants to 

trade on a SEF, the SEF should not have any 

barriers to entry.’’), Roundtable Tr. at 52, (‘‘The 

point is if you have a firm who is doing customer 

business and wants to engage in an interest rate 

swap with an end user who is not a clearing 

member, that they should be able to execute that 

trade with the end user and then give up to a 

clearing member.’’), Roundtable Tr. at 84; 

Comments from William DeLeon, Executive Vice 

President, Global Head of Portfolio Risk 

Management, PIMCO (‘‘You know, that concept of 

using a SEF, I think it should be free and open 

access * * *. The issue is that there needs to be a 

guarantee that when you access a SEF, that when 

you do a trade, that there is someone who is 

guarantee that that is a good trade. So whether that 

means that there’s a market maker * * * or if that 

means that there’s a DCM or an FCM or someone 

who’s going to guarantee that they’re going to stand 

behind * * * unknown clients * * * ’’), 

Roundtable Tr. at 56. 

68The Commission acknowledges that a DCM 

may have already assigned the functions of a 

Membership or Participation Committee to other 

governing bodies. Therefore, the proposed rules 

permit the DCM Board of Directors to delegate the 

performance of the functions of the Membership or 

Participation Committee to one or more other 

committees, provided that each such committee 

meets the applicable composition requirements. If 

the Board of Directors chooses to so delegate, the 

registered swap execution facility would no longer 

need to maintain a Membership or Participation 

Committee. 

69See 72 FR 6950, 6951. 

70 Id. at 6951. 

Management Subcommittee’’) the 

responsibility to: (i) Determine the 

standards and requirements for initial 

and continuing clearing membership 

eligibility; (ii) approve or deny (or 

review approvals or denials of) clearing 

membership applications; and (iii) 

determine products eligible for clearing. 

If the Risk Management Committee 

effects such a delegation, then it would 

free itself of the composition 

requirements. The decisions of the Risk 

Management Subcommittee would be 

subject to review by the Risk 

Management Committee. Therefore, if 

the Risk Management Committee 

determines that a particular decision by 

the Risk Management Subcommittee is 

overly risky, then the Risk Management 

Committee may overrule that 

decision.65

In order to prevent evasion of the 

above-mentioned composition 

requirements through internal 

reorganization, the Commission 

proposes to prohibit: 

• A decision of the Risk Management 

Subcommittee from being subject to the 

approval of, or otherwise restricted or 

limited by, a body other than the DCO 

Board of Directors or the DCO Risk 

Management Committee, including, 

without limitation, any advisory 

committee; and 

• Certain decisions of the Risk 

Management Committee 66 from being 

subject to the approval of, or otherwise 

restricted or limited by, a body other 

than the DCO Board of Directors, 

including, without limitation, any 

advisory committee. 

The Commission requests comment 

on its three-pronged approach, 

including any alternatives to such 

approach. The Commission also 

requests comment on (i) the specific 

percentages set forth above, and (ii) the 

prohibitions on certain bodies 

approving of, or otherwise restricting or 

limiting, the decisions of the Risk 

Management Committee (or Risk 

Management Subcommittee, as 

applicable). 

3. Requirements for Each DCM or SEF 

Only 

a. Membership or Participation 

Committee 

As mentioned above, increased 

competition may exacerbate conflicts of 

interest, causing a DCM or SEF to (i) 

prioritize commercial interests over selfregulatory responsibilities; and (ii) 

restrict access or impose burdens on 

access in a discriminatory manner. 

Roundtable participants identified a 

specific example of (ii), where swap 

clearing members may seek to limit 

access to SEF execution and pricing to 

customers executing through such 

members.67 The rationale of such 

example would apply to a DCM as well. 

To protect decisions regarding access 

from DCM or SEF commercial interests, 

or the interests of the enumerated 

entities, the Commission proposes 

requiring a DCM or SEF to have a 

Membership or Participation 

Committee, composed of thirty-five 

percent public directors.68 Such 

committee would have the 

responsibility to: (i) Determine the 

standards and requirements for initial 

and continuing membership or 

participation eligibility; (ii) review 

appeals of staff denials of membership 

or participation applications; and (iii) 

approve rules that would result in 

different categories or classes of 

members or participants receiving 

disparate access. The Commission 

proposes prohibiting the Membership or 

Participation Committee from 

upholding any staff denial if the 

relevant application meets the standards 

and requirements that such committee 

sets forth. Further, the Commission 

proposes prohibiting the Membership or 

Participation Committee from restricting 

access or imposing burdens on access in 

a discriminatory manner, within each 

category or class of members or 

participants or between similarly 

situated categories or classes of 

members or participants. Nothing in this 

preamble is meant to prohibit the 

Commission from issuing substantive 

proposals regarding access to a DCM or 

SEF in any subsequent proposed 

rulemaking. 

b. Regulatory Oversight Committee 

In the DCM Conflicts of Interest 

Release, the Commission emphasized 

the importance of a DCM Regulatory 

Oversight Committee (‘‘ROC’’): 

Properly functioning ROCs should be 

robust oversight bodies capable of firmly 

representing the interests of vigorous, 

impartial, and effective self-regulation. ROCs 

should also represent the interests and needs 

of regulatory officers and staff; the resource 

needs of regulatory functions; and the 

independence of regulatory decisions. In this 

manner, ROCs will insulate DCM selfregulatory functions, decisions, and 

personnel from improper influence, both 

internal and external.69

The Commission also underscored the 

importance of the DCM ROC being 

composed of 100 percent public 

directors: 

The Commission strongly believes that 

new structural conflicts of interest within 

self-regulation require an appropriate 

response within DCMs. The Commission 

further believes that ROCs, consisting 

exclusively of public directors, are a vital 

element of any such response * * *. ROCs 

make no direct commercial decisions, and 

therefore, have no need for industry directors 

as members. The public directors serving on 

ROCs are a buffer between self-regulation and 

those who could bring improper influence to 

bear upon it.70

The Commission proposes (i) 

maintaining the requirement that DCMs 

have a ROC composed of only public 

directors, and (ii) extending such 

requirement to SEFs, which also have 

self-regulatory obligations. However, the 

Commission recognizes that SEFs—but 

not DCMs—must have a chief 

compliance officer (i) to monitor SEF 

adherence to statutory, regulatory, and 


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71See Section 5h(f)(15) of the CEA, as added by 

Section 733 of the Dodd-Frank Act. 

72See, generally, 74 FR 18982 (April 27, 2009). 

73See 69 FR 71127 (December 8, 2004) (the ‘‘SEC 

2004 Release’’). 

74E.g., the Options Clearing Corporation, or a SEF 

that lists both CDS indices and single-name CDS 

contracts. 

75See, e.g., the listing standards of NYSE 

Euronext or NASDAQ OMX. 76CFE Comment Letter at 2. 

77The Commission proposes not to limit nonvoting equity. In general, a shareholder would have 

direct influence over a DCO, DCM, or SEF Board 

of Directors only if the shareholder has the ability 

to exercise voting rights with respect to, e.g., 

election, compensation, or removal of directors. 

However, the Commission notes that certain 

Roundtable participants disagree. See, e.g., 

Comments from Slavkin (‘‘I actually disagree with 

what the gentleman from JP Morgan said when he 

said that he doesn’t think that having an economic 

stake without having a voting interest is a concern. 

I think most of us can imagine a situation where 

someone owns 5 percent of our company and asks 

us to do something. I don’t think it matters if that 

person gets to vote for the board of directors, that 

person has real influence regardless of whether it’s 

formal influence, there is going to be influence over 

the decision making, there’s going to be influence 

over the strategy and innovation and the trajectory 

of the institution in general, so I do think we need 

to look at ownership restrictions related to voting 

interests as well as related to economic interests 

even when they’re not tied to actual voting shares’’), 

Roundtable Tr. at 153. The Commission requests 

comment on whether limits on non-voting equity 

would be appropriate to the mitigation of conflicts 

of interest. 

78Certain Roundtable Participants agree. See, e.g., 

Comments from Slavkin (‘‘What I’m hearing from 

the people who support governance as opposed to 

real caps on ownership is an argument in favor of 

the status quo, and I think that when Congressman 

Brown—I’m sorry, when Congressman Lynch 

proposed this amendment that was passed in the 

House legislation, and when Senator Brown 

proposed, you know, the Lynch Light version that 

was passed by the entire Congress, their intention 

self-regulatory requirements and (ii) to 

resolve conflicts of interest that may 

impede such adherence. The chief 

compliance officer must report to the 

SEF Board of Directors (or similar 

governing body) or the senior SEF 

officer.71 Since the Dodd-Frank Act 

charges the SEF Board of Directors (or 

similar governing body) or the senior 

SEF officer with the responsibility for 

overseeing the chief compliance officer 

(including with respect to the resolution 

of conflicts of interest), the Commission 

requests comment on whether requiring 

a SEF to also have a ROC is necessary. 

iv. Definition of Public Director 

The proposed rules include a 

definition of ‘‘public director’’ that 

makes several modifications to the 

definition of ‘‘public director’’ that the 

Commission adopted in 2009.72 Such 

modifications bring several aspects of 

the definition in line with the definition 

of ‘‘independent director’’ that the SEC 

proposed in 2004.73 Since the 

Commission is currently, or will in the 

future, be regulating some of the same 

entities as the SEC,74 the modifications 

to the definition of ‘‘public director’’ are 

intended to allow for greater 

harmonization with the SEC and 

currently accepted practices.75

First, the proposed rules include a 

new bright-line test that prohibits any 

director that is an officer of another 

entity, which entity has a compensation 

committee, on which any officer of the 

registered entity serves, from being a 

public director. This test is a part of the 

independence tests of most listing 

standards and prevents a public director 

from having a financial relationship that 

would likely impair his independence. 

In light of the obvious conflicts that 

could arise as a result of such a financial 

relationship, the Commission proposes 

that this additional bright-line test be 

included in the definition of ‘‘public 

director.’’ 

Second, the proposed rules would 

preclude directors that are employees of 

members of DCOs, DCMs, and SEFs 

from being public directors. The 

proposed rules would also preclude a 

director, or an entity with which the 

director is an employee, from being a 

public director if certain payments are 

made to such director. In 2009, the 

Commission moved the evaluation of 

employment relationships from the 

bright-line test to an analysis under the 

overarching materiality standard. The 

Commission is re-evaluating such move 

in light of current concerns regarding 

further protecting regulatory functions 

from directors that are conflicted due to 

industry ties. The Commission notes 

that CBOE Futures Exchange, LLC 

(‘‘CFE’’) submitted a comment letter to 

this effect in 2009. In particular, CFE 

expressed concern that, as a result of the 

removal of employment relationships 

from the bright-line tests, all required 

public directors could be member 

employees.76 At the time, the 

Commission felt that such a situation 

would be incompatible with the 

overarching materiality test, even if 

such prohibition against employment 

was not included in the bright-line test. 

The Commission seeks comments 

regarding the re-insertion of 

employment relationships in the brightline tests. 

Third, the proposed ‘‘public director’’ 

definition includes an expanded 

definition of ‘‘immediate family’’ that 

includes certain family members, 

whether by blood, marriage or adoption, 

and also includes any person residing in 

the home of the director or his 

immediate family. Such change 

attempts to harmonize the ‘‘public 

director’’ definition with the SEC 2004 

Release and currently accepted 

practices. 

Finally, the Commission notes that 

the proposed rules retain the one-year 

look-back period. The Commission 

seeks comment as to whether such 

period should be increased, given (i) 

current concerns regarding further 

protecting regulatory functions from 

directors that are conflicted due to 

industry ties, and (ii) the goal of 

achieving harmony with the SEC and 

currently accepted practices. 

v. Questions on Committees and the 

Definition of Public Director 

In addition to any questions that the 

Commission may have posed above, the 

Commission seeks comment on the 

following questions regarding DCO, 

DCM, or SEF committees, and the 

attendant composition requirements, as 

well as the definition of public director: 

• Is each of the committees or panels 

specified above necessary or appropriate 

for the mitigation of the conflicts of 

interest described in Section II, or of any 

conflict of interest not identified herein? 

If so, are the composition requirements 

applicable to such committees necessary 

or appropriate to effect such mitigation? 

• What other ways should the 

Commission consider defining ‘‘public 

director’’? Are there other circumstances 

that the Commission should include in 

the bright-line materiality tests? Are 

there circumstances that the 

Commission should remove from such 

tests? 

b. Ownership and Voting Limits 

As mentioned above, the structural 

governance requirements mitigate DCO, 

DCM, or SEF conflicts of interest by 

introducing a perspective independent 

of competitive, commercial, or industry 

considerations to the deliberations of 

governing bodies. The Commission 

believes that limits on ownership of 

voting equity and the exercise of voting 

rights would enhance the structural 

governance requirements.77 In general, 

individuals are compensated for service 

on the Board of Directors (and the 

committees thereof). Voting 

shareholders elect, directly or 

indirectly, members of the Board of 

Directors. Such members serve as 

fiduciaries to all shareholders under 

state law. Therefore, to ensure that DCO, 

DCM, or SEF public directors maintain 

their independent perspective (rather 

than solely representing the 

competitive, commercial, or industry 

considerations of shareholders), the 

Commission believes that limits on 

ownership of voting equity and the 

exercise of voting rights are necessary.78


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was to create real change in recognition of the fact 

that the current system is broken. It doesn’t work. 

That’s why we’re all sitting around this table today. 

Governance is a valuable tool, it’s not the only tool, 

and I think it’s our responsibility to try to examine 

other options and I think that the ownership cap is 

a real valuable tool that can be used to mitigate the 

problems that exist in the current system’’), 

Roundtable Tr. at 124 to 125. 

The European Commission Proposal explicitly 

rejects ownership limitations. See Section 4.3.4 of 

the European Commission Proposal (stating that 

structural governance requirements ‘‘are considered 

more effective in addressing any potential conflicts 

of interest that may limit the capacity of CCPs to 

clear, than any other form of regulation which may 

have undesirable consequence on market structures 

(e.g., limitation of ownership, which would need to 

extend also to so-called vertical structures in which 

exchanges own a CCP)’’). 

However, the European Commission Proposal 

explicitly preserves the power of the regulator to 

refuse authorization of a CCP ‘‘where, it is not 

satisfied as to the suitability of the shareholders or 

members that have qualifying holdings in the CCP, 

taking into account the need to ensure the sound 

and prudent management of a CCP.’’ See Article 

28(2) of the European Commission Proposal. 

Further, the European Commission Proposal 

permits the regulator to terminate authorization of 

a CCP where ‘‘shareholders or members, whether 

direct or indirect, * * * exercise an influence 

which is likely to be prejudicial to the sound and 

prudent management of the CCP.’’ See Article 28(1) 

and (4) of the European Commission Proposal. 

The Commission requests comment as to whether 

a reservation of power similar to that contained in 

the European Commission Proposal would 

complement the limits on ownership of voting 

equity and the exercise of voting power described 

above. 

79 72 FR at 6938. 

80The Commission requests comment on whether 

the definitions of ‘‘related person’’ in the proposed 

rules are under or over-inclusive. 

81Ruben Lee, The Governance of Financial 

Infrastructure, Oxford Finance Group, at 256 

(January 2010) (stating that ‘‘[m]andatory ownership 

constraints may prevent a single firm from 

exercising undue influence over a market 

institution that is also an SRO’’). 

82See, generally, e.g., Bae, K–H., J–K and J–M 

Kang (2002). ‘‘Tunneling or value added? Evidence 

from mergers by Korean business groups’’, Journal 

of Finance 57, pp. 2695–2740; Barclay, M. and C. 

Holderness (1989) ‘‘Private benefits from control of 

public corporations’’, Journal of Financial 

Economics 25, pp. 371–395; Barclay, M. and C. 

Holderness (1991) ‘‘Negotiated block trades and 

corporate control’’, Journal of Finance 46, pp. 861– 

878; Barclay, M. and C. Holderness and D. Sheehan 

(2001) ‘‘The block pricing puzzle’’, Working Paper; 

Cheung,Y–L, P.R. Rao and A. Stouraitis (2006) 

‘‘Tunneling, propping, and expropriation: evidence 

from connected party transactions in Hong Kong’’, 

Journal of Financial Economics 82, pp. 343–386; 

Claessens, S., S. Djankov, L.H.P. Lang (2000) ‘‘The 

separation of ownership and control in East Asian 

corporations’’, Journal of Financial Economics 58, 

pp. 81–112; Dyck, A and L. Zingales (2004) ‘‘Private 

benefits of control: An international comparison’’, 

Journal of Finance 59, pp. 537–600; Faccio, M., 

L.H.P Lang, and L. Young (2001) ‘‘Dividends and 

expropriation’’, American Economic Review 91, 54– 

78; and Morck, R., D. Wolfenzon, and B. Yeung 

(2005) ‘‘Corporate governance, economic 

entrenchment, and growth’’, Journal of Economic 

Literature, 43, pp. 655–72. 

The 20 percent limitation also accords with the 

proposals in the SEC 2004 Release. See 69 FR at 

71143–44. 

83As mentioned above, CME, for example, is 

wholly-owned by CME Group. However, CME 

Group is a publicly-listed company with diffuse 

ownership. 

84Comments from Greenberger (‘‘if we want 

governance with teeth, governance with teeth will 

have ownership limitations. You can talk about fair 

representation, board governance, the fact of the 

matter is, and I think this will bear its way out in 

the comments to you, that does not protect fair and 

open access * * *’’), Roundtable Tr. 135. 

85Cf. The Lynch Amendment, which prohibited 

certain ‘‘restricted owners’’ from collectively 

acquiring more than 20 percent of the voting equity 

in a DCO. 

86See, generally, Barclay, M. and C. Holderness 

(1989) ‘‘Private benefits from control of public 

corporations’’, Journal of Financial Economics 25, 

pp. 371–395. The premise of this paper is that (i) 

buyers of equity blocks in a publicly-traded 

corporation appear, on average, to pay a premium 

above market price, and (ii) such premium reflects 

the value to the buyer of being able to influence the 

decisions of the corporation in a way that is 

privately profitable, but not profitable to other 

shareholders. In general, the Commission believes 

that, if a DCO has diffuse ownership, the outlay that 

an enumerated entity would need to make to 

influence DCO risk assessments as a voting 

shareholder would likely exceed the outlay 

necessary to obtain the same amount of influence 

through other means. 

i. DCOs 

According to the DCM Conflicts of 

Interest Release, ‘‘[t]oday’s DCMs * * * 

are vibrant commercial enterprises 

competing globally in an industry 

whose ownership structures, business 

models, trading practices, and products 

are evolving rapidly.’’ 79 The same 

evolution, and the diversity in 

ownership structures that it engenders, 

may be observed in DCOs. Therefore, in 

acknowledgement of the different DCO 

ownership structures that currently or 

may in the future exist, the Commission 

proposes that a DCO choose between 

one of two alternative limitations on 

ownership of voting equity and the 

exercise of voting rights. However, the 

Commission recognizes that 

circumstances may exist where neither 

alternative may be appropriate. 

Consequently, the Commission also 

proposes a waiver procedure. 

1. First Alternative 

For the first alternative, the 

Commission proposes a combination of 

a single-member limitation and an 

aggregate limitation (the ‘‘First 

Alternative’’). 

a. Single-Member Limitation 

First, the Commission proposes 

requiring a 20 percent limitation on the 

voting equity that any single member 

(and related persons) 80 may own.81

Economic research suggests that holding 

20 percent voting equity of an entity 

may be sufficient for exerting control 

over an entity,82 especially if that entity 

has otherwise diffuse ownership.83

As described above, based on 

Commission experience, control of a 

DCO by members collectively has 

generally permitted the DCO to serve 

the purposes of the CEA. However, such 

description does not necessarily hold 

true if, for example, the DCO has 

demutualized but one member retains 

sufficient voting ownership to dominate 

the DCO.84 Such domination may result 

in the DCO relaxing risk management 

standards with respect to that member, 

but imposing more stringent standards 

on others. 

Given the increased importance of the 

DCO in managing systemic risk, the 

Commission believes that limiting the 

amount of voting equity that any one 

member may own is appropriate to 

ensure impartiality in risk assessment, 

especially in a DCO with otherwise 

diffuse ownership. To prevent evasion 

of the 20 percent limitation, the 

Commission proposes requiring an 

identical limit on voting rights; and if 

the DCO is a subsidiary, extending the 

limitation to the shareholders of its 

direct or indirect parent. If any parent 

is publicly-listed, then that parent 

would have to comply with shareholder 

voting requirements promulgated by the 

SEC or the exchange on which the 

parent is listed. 

b. Aggregate Limitation 

Further, the Commission proposes a 

40 percent limitation on the voting 

equity that the enumerated entities (and 

their related persons) may own in the 

aggregate, regardless of whether such 

entities are DCO members.85 As 

mentioned above, some market 

participants, investor advocates, and 

academics have argued that the 

enumerated entities may have 

commercial incentives to influence DCO 

risk assessments regarding (i) whether a 

swap contract is capable of being 

cleared, (ii) the appropriate membership 

criteria for a swap clearing member, and 

(iii) whether a particular entity meets 

such criteria. The enumerated entities 

may directly influence such assessments 

through participation on the Risk 

Management Committee as clearing 

members, or indirectly influence such 

assessments as voting shareholders. In 

general, the Commission believes that 

the enumerated entities would attempt 

to influence such assessments as voting 

shareholders only if the DCO has a 

mutualized structure with concentrated 

ownership.86 In such a structure, the 

percentage necessary for control would 

be higher than the abovementioned 20 

percent, which is sufficient for a diffuse 

ownership structure. 

In counterweight to the commercial 

incentives that the enumerated entities 

may have to influence DCO risk 

assessments regarding (i), (ii), and (iii) 


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87See, e.g., Comments from Jeremy Barnum, 

Managing Director, J.P. Morgan (‘‘Barnum’’) (‘‘So, on 

the question of—on the question of ownership of 

clearinghouses and expertise and the Lynch 

amendment, the—it is very appealing in principle 

to imagine that these systemically important 

financial players into which we are putting much 

more risk, could somehow be entirely free of the 

nefarious influence of the evil dealers who 

contributed to the crisis to quote Mr. Greenberger. 

But, unfortunately, they are, in fact, the market 

participants who need to use the clearinghouses’’), 

Roundtable Tr. at 115; Comments from Olesky (‘‘I 

think it’s really important to recognize—for all of 

us to recognize—that market participants really 

engender many market facilities. And in my 

experience in the investment of capital and the 

knowledge about a particular space has led directly 

to innovations and advances both with Tradeweb 

and another company I was with, BrokerTech; 

exchanges; clearing corps. If you go back in history, 

those are the folks that have the capital to support 

this innovation and the knowledge and experience 

to move it forward. And while it’s easy to sort of 

be critical of that group, I think it’s also important 

not to cut off that flow of capital into innovative 

organizations that are really groups of market 

participants that are investing in these types of 

mechanisms * * * Tradeweb was started in 1997 

with the internet with a group of banks. We had 

four banks initially. Then we sold 100 percent of 

the company in 2004 and we weren’t owned by any 

banks for 4 years. Then we had another investment 

back in, and we had a minority stake by some 

banks. I think we really have to separate out the 

ownership argument from the governance 

argument, because it’s critical to be able to access 

that capital for entrepreneurs and for innovators 

when they’re trying to build these mechanisms’’), 

Roundtable Tr. at 60 to 61. 

88See, e.g., Comments of Roger Liddell, Chief 

Executive Officer, LCH.Clearnet Group (‘‘Liddell’’) 

(‘‘To go back to the question, I think with 

established organizations, then I think the concept 

of some combination of ownership limits and 

voting caps actually does make sense. For example, 

in the [LCH] clearinghouse, we’ve got a 5 percent 

voting cap and have done for many years. And the 

reason for that was to take away any incentive for 

anyone to build up a stake greater than that so that 

we would be highly unlikely to ever have less than 

20 shareholders. That works well for us’’), 

Roundtable Tr. at 118 to 119. 

89See, e.g., Comments from Olesky, supra note 

87; Comments from Liddell (‘‘However, to pick 

upon the point that Lee Olesky made before, I think 

you have to be a little bit careful in how you treat 

entrepreneurials or starter ventures because most of 

the successful starter ventures have started with a 

relatively small number of banks sharing an interest 

in creating something which then becomes a lot 

bigger’’), Roundtable Tr. at 119. 

above, the Commission acknowledges 

that the enumerated entities have the 

capital and expertise necessary to 

manage the risks of clearing swap 

contracts.87 Therefore, the Commission 

believes that a 40 percent aggregate 

limitation is appropriate, assuming that 

the DCO has a mutualized structure 

with concentrated ownership, because it 

permits the enumerated entities to 

influence, directly or indirectly, but not 

control, DCO risk assessments. 

In conjunction with the 40 percent 

aggregate limitation, the Commission 

proposes requiring a majority vote for 

the passage of any shareholder 

resolution; and if the DCO is a 

subsidiary, extending the aggregate 

limitation and the requirement for a 

majority vote to the shareholders of its 

direct or indirect parent. If any parent 

is publicly-listed, then that parent 

would have to comply with shareholder 

voting requirements promulgated by the 

SEC or the exchange on which the 

parent is listed. 

2. Second Alternative 

For the second alternative, the 

Commission proposes a 5 percent 

limitation on the voting equity that any 

DCO member or enumerated entity 

(whether or not such entity is a DCO 

member), and the related persons 

thereof in each case, may own (the 

‘‘Second Alternative’’). Such a limitation 

effectively ensures that neither a DCO 

member nor an enumerated entity 

would have sufficient power, in a 

concentrated or diffuse ownership 

structure, to exert undue influence, as a 

voting shareholder, over DCO 

operations (including with respect to 

risk assessments regarding (i), (ii), and 

(iii) above). Certain Roundtable 

participants favor a similar approach.88

To prevent evasion of the 5 percent 

limitation, the Commission proposes 

requiring an identical limit on voting 

rights; and if the DCO is a subsidiary, 

extending the limitation to the 

shareholders of its direct or indirect 

parent. If any parent is publicly-listed, 

then that parent would have to comply 

with shareholder voting requirements 

promulgated by the SEC or the exchange 

on which the parent is listed. 

3. Waiver 

As mentioned above, the Commission 

believes that there may be 

circumstances where the imposition of 

rigid limitations on ownership or voting 

rights may not be appropriate for certain 

DCO ownership structures. To provide 

flexibility, a DCO may request that the 

Commission waive individual and/or 

aggregate ownership or voting rights 

limitations by any entity for a 

reasonable period of time. 

The Commission may grant the 

requested waiver if it determines that 

ownership or voting rights limitations 

are not necessary or appropriate to: 

• Improve the governance of the DCO; 

• Mitigate systemic risk; 

• Promote competition; 

• Mitigate conflicts of interest in 

connection with a swap dealer’s or 

major swap participant’s conduct of 

business with the DCO with respect to 

fair and open access and participation 

and product eligibility; and 

• Otherwise accomplish the purposes 

of the Act. 

The Commission may, at any time, 

revoke the waiver. Upon such 

revocation, or at the expiration of the 

waiver period, any such DCO shall 

require divestiture of any relevant 

entity’s ownership or voting rights 

percentages to an individual and/or 

aggregate level that is consistent with 

the First or Second Alternative, or such 

other level that the Commission deems 

appropriate based on the foregoing 

factors as set forth in Section 726(b) of 

the Dodd-Frank Act. 

4. Questions on the First and Second 

Alternatives and the Waiver 

The Commission seeks comment on 

the questions set forth below on the 

First and Second Alternatives, as well as 

the Waiver: 

a. First and Second Alternatives 

• Are the First and Second 

Alternatives effective for mitigating, on 

a prophylactic basis, conflicts of interest 

arising from the control that (i) one 

member may exert as a dominant voting 

shareholder of a DCO and (ii) the 

enumerated entities may collectively 

exert as voting shareholders of a DCO 

(specifically with respect to the DCO 

risk assessments referenced above)? 

What methods, other than the First and 

Second Alternatives, should the 

Commission consider to mitigate such 

conflicts of interest? What are the 

advantages and disadvantages of such 

methods? 

• Under what circumstances would 

the First and Second Alternatives not be 

appropriate for a DCO? For example, 

should the First and Second 

Alternatives apply equally to 

established DCOs and start-up DCOs? 89

• Are the percentages that the 

Commission specifies in the First and 

Second Alternatives effective for 

mitigating conflicts of interest arising 

from the control that (i) one member 

may exert as a dominant voting 

shareholder of a DCO and (ii) the 

enumerated entities may collectively 

exert as voting shareholders of a DCO? 

If not, what alternative percentages 

should the Commission consider to 

achieve such mitigation? 

• Would the First and Second 

Alternatives be effective to mitigate any 

potential conflicts of interest not 

discussed herein? If not, then what 

other equity ownership and voting 

limits should the Commission consider? 

• Should the limits in the First and 

Second Alternatives only apply to 

clearing members, and not enumerated 

entities that are not clearing members? 

Should the limits in the First and 

Second Alternatives apply only to 


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90See, e.g., Comments of McVey (‘‘I think when 

it comes to ownership we have to realize that we 

are embarking on a major transformation of OTC 

markets and all of these entities are going to need 

capital to provide the market efficiencies that we’re 

all seeking to achieve. And rightly or wrongly, 

historically a tremendous amount of the capital for 

clearing, e-trading, data and affirmation hubs, has 

come from the dealer community, and I think it 

would be very dangerous to cut off an important 

source of capital that can lead to some of the market 

improvements that we’re all seeking to achieve’’), 

Roundtable Tr. at 121 to 122. 

91See, generally, Comments of Barnum (‘‘The 

traditional vertically integrated exchange model for 

futures works beautifully in a whole range of 

respects for those products from the perspective of 

liquidity and systemic risk, but it has a couple 

problems. It is—it does seem to create some natural 

monopoly properties. You can debate whether 

they’re severe enough to warrant action or not and 

that’s one of the kinds of tensions that needs to be 

balanced. In addition, they work very well for the 

types of products that naturally attract liquidity on 

exchanges. The whole premise of this is that we’re 

pushing a whole new set of products with different 

liquidity characteristics into central counterparties. 

That means that you cannot apply exactly the same 

framework. There are new challenges that are being 

introduced. They create tensions. And those 

tensions need to be looked at rationally in a 

continuum framework that balances different social 

goods against each other’’), Roundtable Tr. at 116 to 

117. 

92 5 U.S.C. 601 et seq. 

93 5 U.S.C. 601(6). 

94A ‘‘small business concern’’ is generally defined 

as one which is independently owned and operated 

and which is not dominant in its field of operation. 

15 U.S.C. 632. 

95 66 FR 45604, 45609 (August 29, 2001). 

96 47 FR 18618, 18619 (April 30, 1982). 

DCOs, and not to their parent 

companies? 

b. Waiver 

• The Commission seeks comment on 

(i) the circumstances which may require 

an alternative ownership structure for a 

DCO, (ii) the types of alternative 

ownership structures of DCOs that may 

require flexibility in setting ownership 

or voting rights levels consistent with 

achieving the goal of Section 726 of the 

Dodd-Frank Act to mitigate conflicts of 

interest, and (iii) the appropriate means 

to provide such flexibility to the 

Commission during the DCO 

application process if such an 

organization were to adopt an 

alternative structure. 

ii. DCMs or SEFs 

The Commission proposes a 20 

percent limitation on the voting equity 

that any single member (and related 

persons) may own in a DCM or SEF. As 

mentioned above, economic research 

suggests that holding 20 percent voting 

equity of an entity would be sufficient 

for control, especially if such entity has 

otherwise diffuse ownership. Such a 

limitation would prevent any one 

member of a DCM or SEF from 

dominating the decision-making 

process. The Commission also proposes 

an identical limitation on voting rights; 

and if the DCM or SEF is a subsidiary, 

extending the limitation to the 

shareholders of its direct or indirect 

parent. If any parent is publicly-listed, 

then that parent would have to comply 

with shareholder voting requirements 

promulgated by the SEC or the exchange 

on which the parent is listed. 

The Commission, however, does not 

propose imposing a limitation on the 

voting equity that the enumerated 

entities may own in the aggregate. As 

mentioned above, the Dodd-Frank Act 

specifically attempts to encourage 

sustained competition between multiple 

DCMs and SEFs over listing the same 

swap contract. Based on comments from 

Roundtable participants, the 

enumerated entities would be the most 

likely source of funding for a new DCM 

or SEF.90 In this instance, the 

Commission believes that the benefits of 

sustained competition between new 

DCMs and SEFs outweigh the 

incremental benefit of better governance 

through limitations on the aggregate 

influence of the enumerated entities.91

1. Questions on DCM or SEF Limits on 

Ownership and Voting Power 

The Commission seeks comment on 

the questions set forth below on the 

DCM or SEF limits on ownership and 

voting power: 

• Are the single-member limits on 

ownership and voting power effective 

for mitigating, on a prophylactic basis, 

the conflicts of interest that Section II 

identifies? What methods, other than 

such limits, should the Commission 

consider to mitigate such conflicts of 

interest? What are the advantages and 

disadvantages of such methods? 

• Should the Commission also 

consider instituting a waiver procedure 

for DCMs and SEFs with respect to the 

single-member limitation? 

• Should the single-member 

limitation be extended to the parent 

company of a DCM or SEF? 

IV. Effectiveness and Transition Period 

As noted above, the Commission is 

contemplating rulemakings on further 

defining certain entities implicated by 

the proposed rules (e.g., swap dealers, 

major swap participants, and swap 

execution facilities). The Commission 

anticipates that such rulemakings would 

be completed by the statutory deadline 

of July 15, 2011. Therefore, the 

Commission is proposing a staggered 

effective date for the final rules on 

mitigation of conflicts of interest. Any 

portion of the final rules implicating 

entities subject to further definition 

would not become effective until sixty 

(60) days after July 15, 2011. Portions of 

the final rules not involving such 

entities would become effective sixty 

(60) days after the Federal Register 

publication of the final rules. 

Although the Commission proposes 

that the final rules become effective 

within the time periods specified above, 

consistent with the DCM Conflicts of 

Interest Release, the Commission will 

permit each existing DCO, DCM, and 

SEF to phase-in implementation of the 

final rules over two (2) years or two 

regularly-scheduled Board of Directors 

elections. The Commission expects, 

however, all new DCO, DCM, and SEF 

applicants to fully comply with the final 

rules. 

The Commission requests comment 

on the (i) timing of effectiveness for the 

final rules, and (ii) the length of the 

phase-in implementation period. The 

Commission further requests comment 

on whether new DCO, DCM, and SEF 

applicants should have to demonstrate 

compliance with the final rules to 

receive registration. 

V. Numbering 

As the proposed rules constitute 

amendments or additions to Regulation 

Parts 1, 37, 38, 39, and 40, the 

Commission anticipates that the 

numbering of such proposed rules will 

change upon completion of other 

rulemakings concerning such parts. 

VI. Related Matters 

a. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies, in 

proposing rules, consider the impact of 

those rules on ‘‘small entities.’’ 92 The 

term ‘‘small entity’’ has the same 

meaning as the term ‘‘small business’’ 

under the RFA 93 and the term ‘‘small 

business’’ generally has the same 

meaning as the term ‘‘small business 

concern’’ under section 3 of the Small 

Business Act.94

The proposed rules detailed in this 

release would only affect DCOs, DCMs, 

and SEFs. The Commission has 

previously determined that DCOs 95 and 

DCMs 96 are not ‘‘small entities’’ for 

purposes of the RFA. In contrast, SEFs 

constitute a new category of registrant 

that the Dodd-Frank Act created. 

Accordingly, the Commission has not 

addressed the question of whether SEFs 

are, in fact, ‘‘small entities’’ for purposes 

of the RFA. 

The Dodd-Frank Act defines a SEF to 

mean a trading system or platform in 

which multiple participants have the 


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97See Section 721 of the Dodd-Frank Act. The 

Commission anticipates proposing regulations that 

would further specify those entities that must 

register as a SEF. The Commission does not believe 

that such proposals would alter its determination 

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

the RFA. 

98See Core Principle 2 applicable to SEFs under 

Section 733 of the Dodd-Frank Act. 

99 44 U.S.C. 3501 et seq. 100 7 U.S.C. 19(a). 

ability to execute or trade swaps by 

accepting bids and offers made by 

multiple participants in the facility or 

system, through any means of interstate 

commerce, including any trading 

facility that facilitates the execution of 

swaps between persons and is not a 

designated contract market.97 The 

Commission is hereby proposing that 

SEFs not be considered to be ‘‘small 

entities’’ for essentially the same reasons 

that DCMs and DCOs have previously 

been determined not to be small 

entities. These reasons include the fact 

that the Commission designates a 

contract market or registers a derivatives 

clearing organization only when it 

meets specific criteria including 

expenditure of sufficient resources to 

establish and maintain adequate selfregulatory programs. Likewise, the 

Commission will register an entity as a 

SEF only after it has met specific criteria 

including the expenditure of sufficient 

resources to establish and maintain an 

adequate self-regulatory program.98

Accordingly, the Commission does not 

expect the rules, as proposed herein, to 

have a significant impact on a 

substantial number of small entities. 

Therefore, the Chairman, on behalf of 

the Commission, hereby certifies, 

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

proposed amendments will not have a 

significant economic impact on a 

substantial number of small entities. 

The Commission invites the public to 

comment on whether SEFs covered by 

these rules should be considered small 

entities for purposes of the RFA. 

b. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) 99 imposes certain requirements 

on Federal agencies in connection with 

their conducting or sponsoring any 

collection of information as defined by 

the PRA. The proposed rules do not 

require a new collection of information 

on the part of any entities that would be 

subject to the proposed rules. 

Accordingly, for purposes of the PRA, 

the Commission certifies that the 

proposed rules, if promulgated in final 

form, would not impose any new 

reporting or recordkeeping 

requirements. 

c. Cost-Benefit Analysis 

Section 15(a) of the CEA 100 requires 

that the Commission, before 

promulgating a regulation or issuing an 

order, to consider the costs and benefits 

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

of the CEA does not require the 

Commission to quantify the costs and 

benefits of a new regulation or to 

determine whether the benefits of the 

regulation outweigh its costs. Rather, 

Section 15(a) of the CEA simply requires 

the Commission to ‘‘consider the costs 

and benefits’’ of its action. 

Section 15(a) of the CEA further 

specifies that costs and benefits shall be 

evaluated in light of the following 

considerations: (1) Protection of market 

participants and the public; (2) 

efficiency and competition; (3) financial 

integrity of the futures markets and 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

Accordingly, the Commission could, in 

its discretion, give greater weight to any 

one of the five considerations and could 

determine that, notwithstanding its 

costs, a particular regulation was 

necessary or appropriate to protect the 

public interest or to effectuate any of the 

provisions or to accomplish any of the 

purposes of the Act. 

The Commission has evaluated the 

costs and benefits of the proposed rules, 

in light of the specific provisions of 

Section 15(a) of the CEA, as follows: 

1. Protection of market participants 

and the public. The proposed rules 

concern governance and conflicts of 

interest and seek to improve governance 

arrangements to prevent conflicts of 

interest that if not addressed, would 

serve the interests of one group of 

constituents over other groups, 

including other market participants and 

the public. The proposed rules require 

governance arrangements that allow the 

registered entities to better serve the 

public interest. 

2. Efficiency and competition. The 

proposed rules provide for the 

identification and mitigation of conflicts 

of interest, which improves efficiency in 

decision-making and increases fair 

access to clearing and markets which 

improves competition. 

3. Financial integrity of futures 

markets and price discovery. The 

proposed rules facilitate transparency in 

governance which, in turn, facilitates 

transparency in matters governed 

including increased fair access to 

clearing and trading which, in turn, 

facilitates price discovery. This 

decreases risk which, in turn, increases 

financial integrity. 

4. Sound risk management practices. 

The proposed rules provide for 

participation in decision-making by 

those who share in the risk presented by 

the operation of the registered entity. 

The governance arrangements provided 

by the proposed rules provide for a 

balance among different interests 

(including the public interest) so that 

risks presented by one group’s interests 

will not dominate decision-making in 

the organization. This balance should 

prevent excess risk associated with any 

one group’s interests from affecting 

operations. 

5. Other public interest 

considerations. The proposed rules 

provide for governance arrangements for 

DCOs, DCMs, and SEFs, as well as 

methods of mitigating the presence of 

conflicts of interest, that should, for the 

reasons, cited above, operate in the best 

interests of the public. 

Accordingly, after considering the five 

factors enumerated above, the 

Commission has determined to propose 

the regulations set forth below. The 

Commission invites public comment on 

its evaluation of the costs and benefits 

of the proposed rules. Specifically, 

commenters are invited to submit data 

quantifying the costs and benefits of the 

proposed rules with their comment 

letters. 

VII. Text of Proposed Rules 

List of Subjects 

17 CFR Part 1 

Definitions, Directors, Committees. 

17 CFR Part 37 

Swap execution facility, Conflict of 

Interest, Membership, Access, Voting, 

Ownership. 

17 CFR Part 38 

Designated contract markets, Conflict 

of interest, Membership, Access, Voting, 

Ownership. 

17 CFR Part 39 

Registered clearing organization, 

Conflict of interest, Membership, 

Access, Voting, Ownership. 

17 CFR Part 40 

Governance, Directors, Committees, 

Conflict of interest. 

For the reasons stated in this release, 

the Commission hereby amends 17 CFR 

parts 1, 37, 38, 39, and 40 as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

1. Revise the authority citation for 

part 1 to read as follows: 


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Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 

6b, 6c, 6d, 6e, 6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 

60, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23, and 24 and Sec. 726, Pub. 

L. 111–203, 124 Stat. 1376. 

2. Section 1.3 is amended by adding 

paragraphs (zz) through (aaa) to read as 

follows: 

§ 1.3 Definitions 

(zz) Board of Directors. This term 

means the Board of Directors or Board 

of Governors of a company or 

organization, or equivalent governing 

body. 

(aaa) Disciplinary Panel. This term 

shall be as defined in § 40.9(c)(3)(i). 

(bbb) Executive Committee. This term 

shall mean a committee of the Board of 

Directors that may exercise the authority 

delegated to it by the Board of Directors 

with respect to the management of the 

company or organization. 

(ccc) Public Director. This term means 

a member of the Board of Directors 

(each, a ‘‘director’’) of a registered 

derivatives clearing organization (as 

defined in Section 1a(15) of the Act), a 

board of trade designated as a contract 

market pursuant to Section 5 of the Act, 

or a registered swap execution facility 

(as defined in Section 1a(50) of the Act), 

as applicable, who has been found, by 

the Board of Directors of the registered 

entity, on the record, to have no 

material relationship with such 

registered entity. The Board of Directors 

must make such finding upon the 

nomination or appointment of the 

director and as often as necessary in 

light of all circumstances relevant to 

such director, but in no case less than 

annually. 

(1) For purposes of this definition, a 

‘‘material relationship’’ is one that 

reasonably could affect the independent 

judgment or decision-making of the 

director. In making the finding specified 

in paragraph (ccc) of this section, the 

Board of Directors need not consider 

previous service as a director of the 

registered entity to constitute a ‘‘material 

relationship.’’ Circumstances in which a 

director shall be considered to have a 

‘‘material relationship’’ with the 

registered entity include, but are not 

limited to, the following: 

(i) Such director is an officer or an 

employee of the registered entity, or an 

officer or an employee of its affiliate. In 

this context, ‘‘affiliate’’ includes parents 

or subsidiaries of the registered entity or 

entities that share a common parent 

with the registered entity; 

(ii) Such director is a member of the 

registered entity, or a director, an 

officer, or an employee of a member. In 

this context, ‘‘member’’ is defined 

according to Section 1a(34) of the Act 

and any regulation promulgated 

thereunder, including, without 

limitation, §§ 1.3(c) and (q) of this 

chapter and any successor provisions; 

(iii) Such director is an officer of 

another entity, which entity has a 

compensation committee (or similar 

body) on which any officer of the 

registered entity serves; 

(iv) Such director, or an entity with 

which the director is a partner, an 

officer, an employee, or a director, 

receives more than $100,000 in 

combined annual payments for legal, 

accounting, or consulting services from 

the registered entity, any affiliate thereof 

(as defined in paragraph (ccc)(1)(i) of 

this section), any member of the 

registered entity (as defined in 

paragraph (ccc)(1)(ii) of this section), or 

any affiliate of such member. 

Compensation for services as a director 

of the registered entity or as a director 

of an affiliate thereof does not count 

toward the $100,000 payment limit, nor 

does deferred compensation for services 

rendered prior to becoming a director of 

the registered entity, so long as such 

compensation is in no way contingent, 

conditioned, or revocable; or 

(v) Notwithstanding paragraph 

(ccc)(1)(iv) of this section, in the case of 

a public director that is a member of the 

Regulatory Oversight Committee, the 

Risk Management Committee (or any 

subcommittee thereof), or the 

Membership or Participation Committee 

(or any committee serving a similar 

function), such director (other than in 

the capacity of a member of such 

committee, any other committee, or the 

Board of Directors, in each case, of the 

registered entity), accepts, directly or 

indirectly, any consulting, advisory, or 

other compensatory fee from the 

registered entity, any affiliate thereof (as 

defined in paragraph (ccc)(1)(i) of this 

section), any member of the registered 

entity (as defined in paragraph 

(ccc)(1)(ii) of this section), or any 

affiliate of such member, other than 

deferred compensation for service 

rendered prior to becoming a member of 

the Regulatory Oversight Committee, the 

Risk Management Committee (or any 

subcommittee thereof), or the 

Membership or Participation Committee 

(or any committee serving a similar 

function), provided that such 

compensation is in no way contingent, 

conditioned, or revocable. 

(vi) Any of the relationships set forth 

in paragraphs (ccc)(1)(i) through 

(ccc)(1)(v) of this section apply to the 

‘‘immediate family’’ of such director, i.e., 

spouse, parents, children, and siblings, 

in each case, whether by blood, 

marriage, or adoption, or any person 

residing in the home of the director or 

that of his or her ‘‘immediate family.’’ 

(2) All of the disqualifying 

circumstances described in paragraph 

(ccc)(1)(i) through (ccc)(1)(v) of this 

section shall be subject to a one-year 

look back. 

(3) A public director of any registered 

entity specified in paragraph (ccc) of 

this section may also serve as a public 

director of an affiliate of the registered 

entity (as defined in paragraph 

(ccc)(1)(i) of this section) if he or she 

otherwise meets the requirements in 

paragraph (ccc)(1)(i) through (ccc)(1)(v) 

of this section. 

(ddd) Membership or Participation 

Committee. This term shall be as 

defined in § 37.19(c)(1)(i), with respect 

to a registered swap execution facility, 

and § 38.851(c)(1)(i), with respect to a 

designated contract market. 

(eee) Nominating Committee. This 

term shall be as defined in 

§ 40.9(c)(1)(i). 

(fff) Regulatory Oversight Committee. 

This term shall be as defined in 

§ 37.19(b)(1), with respect to a registered 

swap execution facility, and 

§ 38.851(b)(1), with respect to a 

designated contract market. 

(ggg) Risk Management Committee. 

This term shall be as defined in 

§ 39.13(g)(1). 

PART 37—SWAP EXECUTION 

FACILITIES 

3. Revise the authority citation for 

part 37 to read as follows: 

Authority: Sec. 726, Pub. L. 111–203, 124 

Stat. 1376. 

4. Revise the heading to Part 37 to 

read as set forth above. 

5. Add § 37.19 to read as follows: 

§ 37.19 Conflicts of Interest. 

(a) General. The swap execution 

facility shall: 

(1) Establish and enforce rules to 

minimize conflicts of interest in its 

decision-making process; and 

(2) Establish a process for resolving 

the conflicts of interest. Nothing in this 

section shall supersede any requirement 

applicable to the registered swap 

execution facility under § 40.9 of this 

chapter. 

(b) Regulatory Oversight Committee. 

(1) General. A registered swap 

execution facility shall have a regulatory 

oversight committee (the ‘‘Regulatory 

Oversight Committee’’), which shall: 

(i) Monitor the regulatory program of 

the registered entity for sufficiency, 

effectiveness, and independence; 

(ii) Oversee all facets of the regulatory 

program, including: 

(A) Trade practice and market 

surveillance; audits, examinations, and 


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other regulatory responsibilities with 

respect to members (including ensuring 

compliance with, if applicable, financial 

integrity, financial reporting, sales 

practice, recordkeeping, and other 

requirements); and the conduct of 

investigations; 

(B) Reviewing the size and allocation 

of the regulatory budget and resources, 

and the number, hiring, termination, 

and compensation of regulatory 

personnel; 

(C) Reviewing the performance of the 

Chief Compliance Officer (as referenced 

in Section 5h(f)(15) of the Act) and 

making recommendations with respect 

to such performance to the Board of 

Directors; 

(D) Recommending changes that 

would ensure fair, vigorous, and 

effective regulation; and 

(E) Reviewing all regulatory proposals 

prior to implementation and advising 

the Board of Directors as to whether and 

how such changes may impact 

regulation. 

(2) Reporting. The Regulatory 

Oversight Committee shall report to the 

Board of Directors of the registered swap 

execution facility. 

(3) Composition. The Regulatory 

Oversight Committee shall be composed 

entirely of Public Directors. 

(4) Delegation. The Regulatory 

Oversight Committee shall oversee the 

regulatory program of the registered 

swap execution facility on behalf of the 

Board of Directors. The Board of 

Directors shall delegate sufficient 

authority, dedicate sufficient resources, 

and allow sufficient time for the 

Regulatory Oversight Committee to 

fulfill its mandate. 

(c) Membership or Participation. 

(1) Committee. 

(i) General. A registered swap 

execution facility shall have a 

membership or participation committee 

(the ‘‘Membership or Participation 

Committee’’), which shall, at a 

minimum, perform the following 

functions: 

(A) Determine the standards and 

requirements for initial and continuing 

membership or participation eligibility; 

(B) Review appeals of staff denials of 

membership or participation 

applications; and 

(C) Approve rules that would result in 

different categories or classes of 

members or participants receiving 

disparate access to the registered swap 

execution facility. 

(ii) Reporting. The Membership or 

Participation Committee shall report to 

the Board of Directors of the registered 

swap execution facility. 

(iii) Composition. The Membership or 

Participation Committee shall be 

composed of thirty-five percent Public 

Directors. 

(iv) Delegation. The Board of Directors 

may choose to delegate the performance 

of the functions of the Membership or 

Participation Committee to one or more 

other committees, provided that each 

such committee meets the composition 

requirements set forth in paragraph 

(c)(1)(iii) of this section. If the Board of 

Directors chooses to so delegate, the 

registered swap execution facility would 

no longer need to maintain a 

Membership or Participation 

Committee. 

(2) Access. 

(i) In reviewing appeals of staff 

denials of membership or participation 

applications, the Membership or 

Participation Committee (or entity 

performing the functions of such 

committee) shall not uphold any staff 

denial if the relevant application meets 

the standards and requirements that 

such committee sets forth. 

(ii) The Membership or Participation 

Committee (or entity performing the 

functions of such committee) shall not, 

and shall not permit the registered swap 

execution facility to, restrict access or 

impose burdens on access in a 

discriminatory manner, within each 

category or class of members or 

participants or between similarlysituated categories or classes of 

members or participants. 

(d) Limits on Voting Equity Ownership 

and the Exercise of Voting Power. 

(1) Definitions. For purposes of this 

§ 37.19(d): 

(i) Related Persons means, with 

respect to any member of a registered 

swap execution facility: 

(A) Any person that, directly or 

indirectly, is a parent or subsidiary of, 

or shares a common parent with, such 

member; 

(B) Any partner, director, officer, or 

other employee of such member; 

(C) Any immediate family member of 

such member, or any immediate family 

member of such member’s spouse, in 

each case, who has the same home as 

such member; or 

(D) Any immediate family member of 

the persons enumerated in paragraph 

(d)(1)(i)(B) of this section, or any 

immediate family member of such 

person’s spouse, in each case, who has 

the same home as such person. 

(2) Limits. A registered swap 

execution facility shall not permit any 

member, together with any Related 

Persons of such member, to: 

(i) Beneficially own, directly or 

indirectly, more than twenty percent of 

any class of equity interest of the 

registered swap execution facility 

entitled to vote; or 

(ii) Directly or indirectly vote, cause 

the vote of, give any consent or proxy 

with respect to the voting of, or enter 

into any shareholder agreement 

regarding the voting of, any interest in 

the registered swap execution facility 

that exceeds twenty percent of the 

voting power of any class of equity 

interest of the registered swap execution 

facility. 

(3) Parent Companies. If the registered 

swap execution facility is a subsidiary, 

paragraph (d)(2) of this section shall 

apply to its parent, whether direct or 

indirect, in the same manner as it 

applies to the registered swap execution 

facility. If any parent is publicly-listed 

on a domestic exchange, then such 

parent must follow the voting 

requirements promulgated by the 

Securities and Exchange Commission or 

the entity on which such parent is 

listed. 

(4) Remediation. A registered swap 

execution facility must have rules 

addressing the manner in which it 

would remediate any breach of the 

limits set forth in paragraph (d)(2) of 

this section. Such rules must specify, at 

a minimum: 

(i) The manner in which the 

registered swap execution facility would 

redeem any equity interest that a 

member or a Related Person purchased 

in excess of the limits set forth in 

paragraph (d)(2) of this section; 

(ii) The manner in which the 

registered swap execution facility would 

disregard any votes cast in excess of 

such limits; and 

(iii) The manner in which the 

registered swap execution facility would 

cause any breach of such limits to be 

reported to the Chief Compliance 

Officer (as referenced in Section 

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

PART 38—DESIGNATED CONTRACT 

MARKETS 

6. Revise the authority citation for 

part 38 to read as follows: 

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

12a and Sec. 726, Pub. L. 111–203, 124 Stat. 

1376. 

7. Section 38.1 is amended by adding 

a new sentence to the end of the section 

to read as follows: 

§ 38.1 Scope. 

* * * Nothing in this Part 38 shall 

apply to a board of trade designated as 

a contract market pursuant to Section 5f 

of the Act. 

8. Add § 38.851 to read as follows: 

§ 38.851 Conflicts of interest. 

(a) General. A designated contract 

market shall establish and enforce rules 


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to minimize conflicts of interest in its 

decision-making process and establish a 

process for resolving any conflicts of 

interest. Nothing in this section shall 

supersede any requirement applicable to 

the designated contract market under 

§ 40.9 of this chapter. 

(b) Regulatory Oversight Committee. 

(1) General. A designated contract 

market shall have a regulatory oversight 

committee (‘‘Regulatory Oversight 

Committee’’), which shall: 

(i) Monitor the regulatory program of 

the registered entity for sufficiency, 

effectiveness, and independence; 

(ii) Oversee all facets of the regulatory 

program, including: 

(A) Trade practice and market 

surveillance; audits, examinations, and 

other regulatory responsibilities with 

respect to members (including ensuring 

compliance with, if applicable, financial 

integrity, financial reporting, sales 

practice, recordkeeping, and other 

requirements); and the conduct of 

investigations; 

(B) Reviewing the size and allocation 

of the regulatory budget and resources, 

and the number, hiring, termination, 

and compensation of regulatory 

personnel; 

(C) Supervising the chief regulatory 

officer of the designated contract 

market, who will report directly to the 

Regulatory Oversight Committee; 

(D) Recommending changes that 

would ensure fair, vigorous, and 

effective regulation; and 

(E) Reviewing all regulatory proposals 

prior to implementation and advising 

the Board of Directors as to whether and 

how such changes may impact 

regulation. 

(2) Reporting. The Regulatory 

Oversight Committee shall report to the 

Board of Directors of the designated 

contract market. 

(3) Composition. The Regulatory 

Oversight Committee shall be composed 

entirely of Public Directors. 

(4) Delegation. The Regulatory 

Oversight Committee shall oversee the 

regulatory program of the designated 

contract market on behalf of the Board 

of Directors. The Board of Directors 

shall delegate sufficient authority, 

dedicate sufficient resources, and allow 

sufficient time for the Regulatory 

Oversight Committee to fulfill its 

mandate. 

(c) Membership or Participation. 

(1) Committee. 

(i) General. A designated contract 

market shall have a membership or 

participation committee (‘‘Membership 

or Participation Committee’’), which 

shall, at a minimum, perform the 

following functions: 

(A) Determine the standards and 

requirements for initial and continuing 

membership or participation eligibility; 

(B) Review appeals of staff denials of 

membership or participation 

applications; and 

(C) Approve rules that would result in 

different categories or classes of 

members or participants receiving 

disparate access to the designated 

contract market. 

(ii) Reporting. The Membership or 

Participation Committee shall report to 

the Board of Directors of the designated 

contract market. 

(iii) Composition. The Membership or 

Participation Committee shall be 

composed of thirty-five percent Public 

Directors. 

(iv) Delegation. The Board of Directors 

may choose to delegate the performance 

of the functions of the Membership or 

Participation Committee to one or more 

other committees, provided that each 

such committee meets the composition 

requirements set forth in paragraph 

(c)(1)(iii) of this section. If the Board of 

Directors chooses to so delegate, the 

registered swap execution facility would 

no longer need to maintain a 

Membership or Participation 

Committee. 

(2) Access. 

(i) In reviewing appeals of staff 

denials of membership or participation 

applications, the Membership or 

Participation Committee (or entity 

performing the functions of such 

committee) shall not uphold any staff 

denial if the relevant application meets 

the standards and requirements that 

such committee sets forth. 

(ii) The Membership or Participation 

Committee (or entity performing the 

functions of such committee) shall not, 

and shall not permit the registered swap 

execution facility to, restrict access or 

impose burdens on access in a 

discriminatory manner, within each 

category or class of members or 

participants or between similarlysituated categories or classes of 

members or participants. 

(d) Limits on Voting Equity Ownership 

and the Exercise of Voting Power. 

(1) Definitions. For purposes of this 

§ 38.851(d): 

(i) Related Persons means, with 

respect to any member of a designated 

contract market: 

(A) Any person that, directly or 

indirectly, is a parent or subsidiary of, 

or shares a common parent with, such 

member; 

(B) Any partner, director, officer, or 

other employee of such member; 

(C) Any immediate family member of 

such member, or any immediate family 

member of such member’s spouse, in 

each case, who has the same home as 

such member; or 

(D) Any immediate family member of 

the persons enumerated in paragraph 

(d)(1)(i)(B) of this section, or any 

immediate family member of such 

person’s spouse, in each case, who has 

the same home as such person. 

(2) Limits. A designated contract 

market shall not permit any member, 

together with any Related Persons of 

such member, to: 

(i) Beneficially own, directly or 

indirectly, more than twenty percent of 

any class of equity interest of the 

designated contract market entitled to 

vote; or 

(ii) Directly or indirectly vote, cause 

the vote of, give any consent or proxy 

with respect to the voting of, or enter 

into any shareholder agreement 

regarding the voting of, any interest in 

the designated contract market that 

exceeds twenty percent of the voting 

power of any class of equity interest of 

the designated contract market. 

(3) Parent Companies. If the 

designated contract market is a 

subsidiary, paragraph (d)(2) of this 

section shall apply to its parent, 

whether direct or indirect, in the same 

manner as it applies to the designated 

contract market. If any parent is 

publicly-listed on a domestic exchange, 

then such parent must follow the voting 

requirements promulgated by the 

Securities and Exchange Commission or 

the entity on which such parent is 

listed. 

(4) Remediation. A designated 

contract market must have rules 

addressing the manner in which it 

would remediate any breach of the 

limits set forth in paragraph (d)(2) of 

this section. Such rules must specify, at 

a minimum: 

(i) The manner in which the 

designated contract market would 

redeem any equity interest that a 

member or a Related Person purchased 

in excess of the limits set forth in 

paragraph (d)(2) of this section; 

(ii) The manner in which the 

designated contract market would 

disregard any votes cast in excess of 

such limits; and 

(iii) The manner in which the 

designated contract market would cause 

any breach of such limits to be reported 

to the chief regulatory officer. 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

9. Revise the authority citation for 

part 39 read as follows: 

Authority: 7 U.S.C. 7b and Sec. 726, Pub. 

L. 111–203, 124 Stat. 1376. 

10. Add § 39.13 to read as follows: 


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§ 39.13 Risk Management. 

(a) through (g) [Reserved] 

(g) Risk Management Committee. 

(1) General. A derivatives clearing 

organization shall have a risk 

management committee (the ‘‘Risk 

Management Committee’’), which shall, 

at a minimum, perform the following 

functions: 

(i) Advise the Board of Directors on 

significant changes to the derivatives 

clearing organization’s risk model and 

default procedures; 

(ii) Determine the standards and 

requirements for initial and continuing 

clearing membership eligibility; 

(iii) Approve or deny (or review 

approvals or denials of) clearing 

membership applications; 

(iv) Determine products eligible for 

clearing; and 

(v) Review the performance of the 

Chief Compliance Officer (as referenced 

in Section 5b(i) of the Act) and make 

recommendations with respect to such 

performance to the Board of Directors. 

(2) Reporting. The Risk Management 

Committee shall report to the Board of 

Directors of the derivatives clearing 

organization. 

(3) Composition. 

(i) The Risk Management Committee 

shall be composed of at least thirty-five 

percent Public Directors of a derivatives 

clearing organization and at least ten 

percent representatives of customers. In 

this context, a ‘‘customer’’ means any 

customer of a clearing member, 

including, without limitation: 

(A) Any ‘‘customer’’ or ‘‘commodity 

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

of this chapter; 

(B) Any ‘‘foreign futures or foreign 

options customer’’ within the meaning 

of § 30.1(c) of this chapter; and 

(C) Any customer entering into a 

cleared swap (as defined in Section 

1a(7) of the Act). 

(ii) The remaining members of such 

Risk Management Committee (or 

subcommittee thereof as described in 

paragraph (g)(5) of this section) may be, 

in the discretion of the derivatives 

clearing organization, representatives of 

clearing members. No such member 

shall be an employee of the derivatives 

clearing organization. 

(iii) The Chairman of the Risk 

Management Committee (or 

subcommittee thereof as described in 

paragraph (g)(5) of this section) shall be 

a Public Director. 

(4) Meetings. The Risk Management 

Committee shall hold regular meetings. 

The Committee may invite employees of 

the derivatives clearing organization to 

attend its meetings in a non-voting 

capacity. 

(5) Delegation. The Risk Management 

Committee may delegate, in writing, the 

performance of the functions 

enumerated in paragraph (g)(1)(ii) to (iv) 

of this section to a subcommittee, 

provided that such subcommittee meets 

the composition requirements set forth 

in paragraph (g)(3) of this section. If the 

Risk Management Committee chooses to 

so delegate, then it would no longer be 

subject to such composition 

requirements. 

(6) Discretion. 

(i) No decision of a subcommittee 

with delegated authority under 

paragraph (g)(5) of this section, 

pertaining to the functions enumerated 

in paragraph (g)(1)(ii) to (iv) of this 

section, may be subject to the approval 

of, or otherwise restricted or limited by, 

a body other than the Board of Directors 

or the Risk Management Committee of 

the derivatives clearing organization, 

including, without limitation, any 

advisory committee. 

(ii) No decision of the Risk 

Management Committee pertaining to 

the functions enumerated in paragraph 

(g)(1)(ii) to (iv) of this section, may be 

subject to the approval of, or otherwise 

restricted or limited by, a body other 

than the Board of Directors of the 

derivatives clearing organization, 

including, without limitation, any 

advisory committee. 

11. Add § 39.25 to read as follows: 

§ 39.25 Conflicts of interest. 

(a) General. (1) A derivatives clearing 

organization shall establish and enforce 

rules to minimize conflicts of interest in 

its decision-making process and 

establish a process for resolving any 

conflicts of interest. 

(2) Governance arrangements for 

derivatives clearing organizations 

should be clear and transparent and be 

designed to promote the safety and 

efficiency of the derivatives clearing 

organization, to support the stability of 

the broader financial system and other 

relevant public interest considerations, 

and to support the objectives of relevant 

stakeholders. 

(3) Nothing in this section shall 

supersede any requirement applicable to 

the derivatives clearing organization 

under § 40.9 of this chapter. 

(b) Limits on Voting Equity Ownership 

and the Exercise of Voting Power. 

(1) Definitions. For purposes of this 

§ 39.25(b): 

(i) Affiliate means any person that, 

directly or indirectly, controls, is 

controlled by, or is under common 

control with, another person. 

(ii) Enumerated Entities means: 

(A) A bank holding company (as 

defined in Section 2 of the Bank 

Holding Company Act of 1956 (12 

U.S.C. 1841)) with total consolidated 

assets of $50,000,000,000 or more, 

(B) A nonbank financial company (as 

defined in Section 102 of the DoddFrank Wall Street Reform and Consumer 

Protection Act) supervised by the Board 

of Governors of the Federal Reserve 

System, 

(C) An Affiliate of such bank holding 

company or nonbank financial 

company, 

(D) A swap dealer (as defined in 

Section 1a(49) of the Act and any 

regulations promulgated thereunder), 

(E) A major swap participant (as 

defined in Section 1a(33) of the Act and 

any regulations promulgated 

thereunder), and 

(F) An associated person of a swap 

dealer or major swap participant (as 

defined in Section 1a(3) of the Act and 

any regulations promulgated 

thereunder). 

(iii) Related Persons means, with 

respect to any person: 

(A) An Affiliate of such person; 

(B) Any partner, director, officer, or 

other employee of such person; 

(C) Any immediate family member of 

such person, or any immediate family 

member of such person’s spouse, in 

each case, who has the same home as 

such person; or 

(D) Any immediate family member of 

the persons enumerated in paragraph 

(b)(1)(iii)(B) of this section, or any 

immediate family member of such 

person’s spouse, in each case, who has 

the same home as such person. 

(2) Limits. A derivatives clearing 

organization shall choose to comport 

with either paragraph (b)(2)(i) or 

(b)(2)(ii) of this section: 

(i)(A) The derivatives clearing 

organization shall not permit any 

member, together with any Related 

Persons of such member, to: 

(1) Beneficially own, directly or 

indirectly, more than twenty percent of 

any class of equity interest of the 

derivatives clearing organization 

entitled to vote; or 

(2) Directly or indirectly vote, cause 

the vote of, give any consent or proxy 

with respect to the voting of, or enter 

into any shareholder agreement 

regarding the voting of, any interest in 

the derivatives clearing organization 

that exceeds twenty percent of the 

voting power of any class of equity 

interest of the derivatives clearing 

organization. 

(B) Additionally, a derivatives 

clearing organization shall not permit 

the Enumerated Entities (whether or not 

they are clearing members), together 

with any Related Persons of such 

Enumerated Entities, to collectively: 

(1) Own, on a beneficial basis, directly 

or indirectly, more than forty percent of 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 200 / Monday, October 18, 2010 / Proposed Rules 63751 

any class of equity interest of the 

derivatives clearing organization 

entitled to vote; or 

(2) Directly or indirectly vote, cause 

the vote of, give any consent or proxy 

with respect to the voting of, or enter 

into any shareholder agreement 

regarding the voting of, any interest in 

the derivatives clearing organization 

that exceeds forty percent of the voting 

power of any class of equity interest of 

the derivatives clearing organization. 

(C) The derivatives clearing 

organization shall ensure that no 

resolution or similar measure on which 

the Enumerated Entities are entitled to 

vote shall be passed by less than a 

majority of all outstanding equity 

interests similarly entitled to vote. 

(ii) The derivatives clearing 

organization shall not permit any 

member or any Enumerated Entity 

(whether or not such entity is a 

member), together with any Related 

Persons in each case thereof, to: 

(A) Beneficially own, directly or 

indirectly, more than five percent of any 

class of equity interest of the derivatives 

clearing organization entitled to vote; or 

(B) Directly or indirectly vote, cause 

the vote of, give any consent or proxy 

with respect to the voting of, or enter 

into any shareholder agreement 

regarding the voting of, any interest in 

the derivatives clearing organization 

that exceeds five percent of the voting 

power of any class of equity interest of 

the derivatives clearing organization. 

(3) Waiver. 

(i) A derivatives clearing organization 

may request that the Commission waive 

the requirements set forth in paragraph 

(b)(2) of this section. 

(ii)(A) The Commission may grant a 

waiver for a period of time that it deems 

reasonable if, upon a showing by a 

derivatives clearing organization, the 

Commission determines that, with 

respect to the derivatives clearing 

organization, the requirements set forth 

in paragraph (b)(2) of this section are 

not necessary or appropriate to: 

(1) Improve the governance of the 

derivatives clearing organization; 

(2) Mitigate systemic risk; 

(3) Promote competition; 

(4) Mitigate conflicts of interest in 

connection with a swap dealer or major 

swap participant’s conduct of business 

with the derivatives clearing 

organization, including with respect to 

Section 2(h)(1)(B) and Section 

5b(c)(2)(c) of the Act; and 

(5) Otherwise accomplish the 

purposes of the Act. 

(B) The Commission may, at any time, 

revoke the waiver upon its own motion. 

Upon such revocation, or at the 

expiration of the waiver period, the 

derivatives clearing organization shall 

require all equity holders to comport, 

through divestiture or other means, with 

the requirements set forth in paragraph 

(b)(2) of this section. 

(4) Parent Companies. If the 

derivatives clearing organization is a 

subsidiary, paragraph (b)(2) of this 

section shall apply to its parent, 

whether direct or indirect, in the same 

manner as it applies to the derivatives 

clearing organization. If any parent is 

publicly listed on a domestic exchange, 

then such parent must follow the voting 

requirements promulgated by the 

Securities and Exchange Commission or 

the entity on which such parent is 

listed. 

(5) Remediation. A derivatives 

clearing organization must have rules 

addressing the manner in which it 

would remediate any breach of the 

limits set forth in paragraph (b)(2) of 

this section. Such rules must specify, at 

a minimum: 

(i) The manner in which the 

derivatives clearing organization would 

redeem any equity interest that a 

member, the Enumerated Entities, or a 

Related Person in each case thereof, 

purchased in excess of the limits set 

forth in paragraph (b)(2) of this section; 

(ii) The manner in which the 

derivatives clearing organization would 

disregard any votes cast in excess of 

such limits; and 

(iii) The manner in which the 

derivatives clearing organization would 

cause any breach of such limits to be 

reported to the Chief Compliance 

Officer (as referenced in Section 5b(i) of 

the Act). 

PART 40—PROVISIONS COMMON TO 

REGISTERED ENTITIES 

1. Revise the authority citation for 

part 40 to read as follows: 

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

12a, and Sec. 726, Pub. L. 111–203, 124 Stat. 

1376. 

2. Add § 40.9 to read as follows: 

§ 40.9 Governance. 

(a) General. (1) Nothing in this section 

shall apply to a board of trade 

designated as a contract market 

pursuant to Section 5f of the Act. 

(2) Capitalized terms not defined 

herein shall have the meanings assigned 

to them in § 1.3 of this chapter. 

(3) Nothing in this section shall 

supersede any requirement applicable to 

the registered entity under Parts 37, 38, 

or 39 of this chapter. 

(b) The Board of Directors. 

(1) General. 

(i) The Board of Directors of a 

registered derivatives clearing 

organization, a designated contract 

market, or a registered swap execution 

facility shall be composed of at least 

thirty-five percent, but no less than two, 

Public Directors. 

(ii) The roles and responsibilities of 

such Board of Directors must be clearly 

articulated, especially in respect of the 

manner in which the Board of Directors 

ensures that a registered entity 

referenced in paragraph (b)(1)(i) of this 

section complies with all statutory, 

regulatory, and self-regulatory 

responsibilities under the Act and the 

regulations promulgated thereunder. 

(2) Parent Companies. 

(i) For purposes of paragraph (b)(2) of 

this section, ‘‘operate’’ shall mean the 

direct exercise of control (including 

through the exercise of veto power) over 

the day-to-day business operations of a 

registered entity specified in paragraph 

(b)(1)(i) of this section by the sole or 

majority shareholder of such registered 

entity, whether through the ownership 

of voting equity, by contract, or 

otherwise. The term ‘‘operate’’ shall not 

prohibit an entity, acting as the sole or 

majority shareholder of such registered 

entity, from exercising its rights as a 

shareholder under any contract, 

agreement, or other legal obligation. 

(ii) A registered entity specified in 

paragraph (b)(1)(i) of this section shall 

not permit itself to be operated by any 

entity unless such entity agrees that: 

(A) Paragraph (b)(1) of this section 

shall apply to such entity in the same 

manner as it applies to the registered 

entity; 

(B) The officers, directors, employees, 

and agents of such entity shall be 

deemed to be the officers, directors, 

employees, and agents of the registered 

entity, and shall thereby be subject to 

the authority of the Commission 

pursuant to the Act and the regulations 

promulgated thereunder; and 

(C) Any books and records of such 

entity relating to such operation shall be 

deemed to be the books and records of 

the registered entity for purposes of the 

Act and the regulations promulgated 

thereunder. Such books and records 

shall be subject at all times to inspection 

and copying by the Commission, 

regardless of whether such books and 

records contain confidential 

information, as long as such entity 

operates the registered entity. 

(3) Expertise. The members of the 

Board of Directors, including Public 

Directors, of each registered entity 

specified in paragraph (b)(1)(i) of this 

section, shall be of sufficiently good 

repute and, where applicable, have 

sufficient expertise in financial services, 

risk management, and clearing services. 


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63752 Federal Register / Vol. 75, No. 200 / Monday, October 18, 2010 / Proposed Rules 

101Section 2(h)(1)(B) and Section 5b(c)(2)(c) of 

the Act. 

(4) Compensation. The compensation 

of the Public Directors and other nonexecutive members of the Board of 

Directors of a registered entity specified 

in paragraph (b)(1)(i) of this section 

shall not be linked to the business 

performance of such registered entity. 

(5) Annual Self-Review. The Board of 

Directors of a registered entity specified 

in paragraph (b)(1)(i) of this section 

shall review its performance and that of 

its individual members annually. It 

should consider periodically using 

external facilitators for such reviews. 

(6) Board Member Removal. A 

registered entity specified in paragraph 

(b)(1)(i) of this section shall have 

procedures to remove a member from 

the Board of Directors, where the 

conduct of such member is likely to be 

prejudicial to the sound and prudent 

management of the registered entity. 

(c) Committees and Panels. 

(1) Nominating Committee. 

(i) General. Each registered 

derivatives clearing organization, 

designated contract market, or registered 

swap execution facility must have a 

nominating committee (‘‘Nominating 

Committee’’), which shall, at a 

minimum: 

(A) identify individuals qualified to 

serve on the Board of Directors, 

consistent with criteria approved by the 

Board of Directors, and with the 

composition requirements set forth in 

this section; and 

(B) Administer a process for the 

nomination of individuals to the Board 

of Directors. 

(ii) Reporting. The Nominating 

Committee shall report to the Board of 

Directors of the registered entity. 

(iii) Composition. The Nominating 

Committee shall be composed of at least 

fifty-one percent Public Directors. The 

chair of the Nominating Committee 

shall be a Public Director. 

(2) Executive Committee. Any 

Executive Committee of a registered 

derivatives clearing organization, 

designated contract market, or registered 

swap execution facility shall be 

composed of at least thirty-five percent, 

but no less than two, Public Directors. 

(3) Disciplinary Panels. 

(i) General. Each registered 

derivatives clearing organization, 

designated contract market, or registered 

swap execution facility must have one 

or more disciplinary panels (each, a 

‘‘Disciplinary Panel’’), each of which 

shall be responsible for conducting 

hearings, rendering decisions, and 

imposing sanctions with respect to 

disciplinary matters. 

(ii) Composition. Each Disciplinary 

Panel shall include at least one person 

who would not be disqualified from 

serving as a Public Director by 

§ 1.3(ccc)(1)(i)–(vi) and (2) of this 

chapter (a ‘‘Public Participant’’). Such 

Public Participant shall chair each 

Disciplinary Panel. In addition, any 

registered entity specified in paragraph 

(c)(3)(i) of this section shall adopt rules 

that would, at a minimum: 

(A) Further preclude any group or 

class of participants from dominating or 

exercising disproportionate influence on 

a Disciplinary Panel and 

(B) Prohibit any member of a 

Disciplinary Panel from participating in 

deliberations or voting on any matter in 

which the member has a financial 

interest. 

(iii) Appeals. If the rules of the 

registered entity provide that the 

decision of a Disciplinary Panel may be 

appealed to another committee of the 

Board of Directors (or similar body), 

then such committee must also include 

at least one Public Participant, and such 

Public Participant must chair the 

committee. 

(iv) Exception. Notwithstanding the 

foregoing, paragraphs (c)(3)(ii) through 

(c)(3)(iii) of this section do not apply to 

a Disciplinary Panel convened for cases 

solely involving decorum or attire. 

(v) Delegation. With respect to a 

registered derivatives clearing 

organization, the Board of Directors may 

delegate to the Risk Management 

Committee the performance of the 

functions of the Disciplinary Panel. If 

the Board of Directors so delegates: 

(A) The registered derivatives clearing 

organization need no longer maintain a 

Disciplinary Panel, but 

(B) Paragraph (c)(3)(iii) of this section 

would still apply to any committee (or 

similar body) to which a decision of the 

Risk Management Committee may be 

appealed. 

Issued in Washington, DC, on October 1, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Concurring Statement of Commissioner Scott 

D. O’Malia 

October 1, 2010 Public Meeting 

I concur in the Commission’s proposal of 

rules pursuant to Section 726 of the DoddFrank Act (the ‘‘Act’’). However, I have a 

number of concerns associated with the 

prescriptiveness of the proposed conflict of 

interest rules. I believe, given the goals of the 

Act, it is appropriate to consider more 

flexible ownership structures and voting 

rights levels as well as the availability of 

waivers for derivatives clearing organizations 

(‘‘DCOs’’). 

Ownership and Voting Limits on DCOs 

A main goal of the Act is to mitigate 

systemic risk in the U.S. financial system by 

imposing a mandatory clearing requirement 

on swaps. Additionally, the business of 

clearing is serious and financially complex. 

I am concerned that the proposed rules may 

not properly consider the effect on mitigation 

of systemic risk, competition, and capital 

formation in the DCO space, or afford the 

Commission with the necessary flexibility to 

achieve those outcomes. Given that the 

Commission has yet to consider any new 

DCO applications under the Act, it is 

extremely unwise to conduct an experiment 

with the ownership structure of DCOs. 

Second, a stated goal of the Act was to 

provide all market participants with fair, 

open, and non-discriminatory access to 

DCOs. To achieve that end, Congress 

included Open Access and Participant and 

Product Eligibility provisions in the Act.101

Each provision addresses and attempts to 

eliminate the potential for clearing entities to 

use ownership control to obstruct market 

participants from gaining access to a DCO. 

Rather than utilizing the limited and 

inflexible ownership caps in the proposed 

rules, I believe that the open access and 

eligibility provisions will be more effective in 

achieving the Act’s goals of fair, open, and 

non-discriminatory access to DCOs. 

Third, an overarching goal of the Act is the 

international harmonization of financial 

regulation. I believe that it’s especially 

important for the Commission to harmonize 

its rules with those of foreign regulators in 

order to prevent regulatory arbitrage. With 

that said, the European Commission released 

(September 15, 2010) a proposal on financial 

reform which does not place individual or 

aggregate ownership limits on DCOs under 

European Union jurisdiction. 

For the aforementioned reasons, I am in 

favor of a more flexible approach to 

limitations on DCO ownership and voting 

rights, including the availability of a full 

waiver for individual and aggregate 

ownership or voting limits on swap dealers 

or major swap participants that hold or desire 

to hold debt or equity positions in DCOs. 

Public Directors 

I fully support the Commission’s decision 

to require a registered entity to have its board 

of directors and certain other committees 

composed of thirty-five percent (35%) public 

directors. This standard is consistent with 

the Commission’s previous core principle 15 

for designated contract markets (‘‘DCMs’’). 

The Commission thoroughly vetted this 

percentage with the public in a recent 

rulemaking and it concluded that having a 

board of directors for DCMs composed of 

thirty-five percent (35%) public directors was 

neither overly burdensome nor cost 

prohibitive. Today’s proposed rulemaking 

also raises the question as to whether it is 

desirable to expand the existing rule from 

thirty-five percent (35%) up to fifty-one 

percent (51%) for DCMs, DCOs, and swap 

execution facilities. I am interested to know 

how this proposal would enhance the 

governance of the existing board structures of 

certain registered entities, and more 

specifically, how it would expand the 

clearing and risk management expertise of a 

DCO. 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 200 / Monday, October 18, 2010 / Proposed Rules 63753 

1 15 U.S.C. 80b. Unless otherwise noted, when we 

refer to the Advisers Act, or any paragraph of the 

Advisers Act, we are referring to 15 U.S.C. 80b of 

the United States Code, at which the Advisers Act 

is codified. 

I strongly encourage the public to closely 

analyze the language of each proposed rule 

and to provide the Commission with 

constructive and detailed comments on each 

of them. In particular, I am interested to 

know (i) what effect the Commission’s 

proposed rules on voting and ownership 

limitations will have on competition, raising 

capital, and managing risk, and (ii) whether 

or not the open access and eligibility 

provisions in Sections 2(h)(1)(B) and 

5b(c)(2)(c) of the Act would be a more 

effective method for the Commission to 

expand access to clearing, rather than placing 

limits on the voting and ownership of DCOs. 

Proposed Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities 

Regarding the Mitigation of Conflicts of 

Interest 

Commissioner Jill E. Sommers, Dissenting 

The Commission is voting today on a 

proposal to implement two sections of the 

Dodd-Frank Act regarding the governance of 

CFTC regulated trading venues and 

clearinghouses that trade or clear swaps and 

how to mitigate conflicts of interest that may 

arise in connection with ownership interests 

that certain entities may have in these 

registrants. Specifically, Section 725(d) of the 

Act directs the Commission to: 

Adopt rules mitigating conflicts of interest 

in connection with the conduct of business 

by a swap dealer or a major swap participant 

with at [DCO], [DCM], or a [SEF] that clears 

or trades swaps in which the swap dealer or 

major swap participant has a material debt or 

material equity investment. 

Section 726 of the Act provides that the 

Commission shall adopt rules which ‘‘may’’ 

include numerical limits on the degree of 

control or voting rights that certain 

enumerated entities may possess with respect 

to DCOs, DCMs and SEFs if the Commission 

determines, after a review: 

That such rules are necessary or 

appropriate to improve the governance of, or 

to mitigate systemic risk, promote 

competition, or mitigate conflicts of interest 

in connection with a swap dealer or major 

swap participant’s conduct of business with, 

a [DCO], [DCM], or [SEF] that clears or posts 

swaps or makes swaps available for trading 

and in which such swap dealer or major 

swap participant has a material debt or 

equity investment. 

I recognize that these provisions direct the 

Commission to adopt strong governance rules 

to mitigate conflicts of interest in connection 

with the interaction between swap dealers 

and major swap participants and DCOs, 

DCMs and SEFs in which they have a 

material debt or equity investment. In my 

opinion, however, the voting equity 

restrictions being proposed are not necessary 

or appropriate to mitigate the perceived 

conflicts and in fact, may do more harm than 

good to the emerging marketplace for trading 

and clearing swaps. 

In 2009, after more than two years of study, 

the Commission finalized acceptable 

practices to provide a safe harbor for 

complying with Core Principle 15 for DCMs 

dealing with conflicts of interest. I support 

making those acceptable practices mandatory 

for DCMs, DCOs and SEFs, as augmented by 

some of the additional provisions being 

proposed today, such as the Risk 

Management Committee for DCOs. I believe 

that strong governance rules, coupled with 

the Commission’s ultimate authority to 

determine which swaps must be cleared, 

under Section 723 of Dodd-Frank, is 

sufficient to ensure that swaps that should be 

listed for trading and cleared will be listed 

for trading and cleared. 

I have grave concerns that the proposed 

limitations on voting equity, especially those 

proposed for enumerated entities in the 

aggregate with respect to DCOs, may stifle 

competition by preventing new DCMs, DCOs 

and SEFs that trade or clear swaps from being 

formed. The Commission recognizes in the 

preamble to the proposal that the enumerated 

entities will be the most likely source of 

funding for new DCMs and SEFs and thus 

chose not to propose the aggregate limits for 

trading venues. I believe the same logic 

applies with even greater force for DCOs. I 

am equally concerned that a number of 

recent entrants into the swaps trading and 

clearing space will potentially be required to 

disband their operations if they are unable to 

attract the required amount of non-voting 

equity within the two-year/two board 

election cycles proposed. I also note that the 

European Commission explicitly rejected 

ownership limitations in its proposal for 

regulating OTC derivatives announced 

September 15th because such limitations 

may have negative consequences for market 

structures. I agree. And I hope that we will 

be mindful of global consistency as we move 

forward. The marketplace for trading and 

clearing swaps is in its infancy. I strongly 

believe that the limitations the Commission 

is proposing will have the effect of inhibiting 

emerging competition rather than promoting 

it. I therefore cannot support today’s 

proposal. 

[FR Doc. 2010–26220 Filed 10–15–10; 8:45 am] 

BILLING CODE P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 275 

[Release No. IA–3098; File No. S7–25–10] 

RIN 3235–AK66 

Family Offices 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (the ‘‘Commission’’) is 

proposing a rule to define ‘‘family 

offices’’ that would be excluded from the 

definition of an investment adviser 

under the Investment Advisers Act of 

1940 (‘‘Advisers Act’’) and thus would 

not be subject to regulation under the 

Advisers Act. 

DATES: Comments must be received on 

or before November 18, 2010. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form, http://www.sec.gov/ 

rules/proposed.shtml; or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–25–10 on the subject line; 

or 

• Use the Federal eRulemaking 

Portal, http://www.regulations.gov. 

Follow the instructions for submitting 

comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–25–10. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Web site, http:// 

www.sec.gov/rules/proposed.shtml. 

Comments are also available for Web 

site viewing and printing in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549 on official business days between 

the hours of 10 a.m. and 3 p.m. All 

comments received will be posted 

without change; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Sarah ten Siethoff, Senior Special 

Counsel, or Vivien Liu, Senior Counsel, 

at (202) 551–6787 or IArules@sec.gov, 

Office of Investment Adviser 

Regulation, Division of Investment 

Management, U.S. Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–8549. 

SUPPLEMENTARY INFORMATION: The 

Securities and Exchange Commission is 

requesting public comment on proposed 

rule 202(a)(11)(G)–1 [17 CFR 

275.202(a)(11)(G)–1] under the 

Investment Advisers Act of 1940 [15 

U.S.C. 80b] (the ‘‘Advisers Act’’ or 

‘‘Act’’).1

Table of Contents 

I. Background 


jlentini on DSKJ8SOYB1PROD with PROPOSALS