2023-14361
[Federal Register Volume 88, Number 133 (Thursday, July 13, 2023)]
[Rules and Regulations]
[Pages 44675-44694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14361]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 39
RIN 3038-AF15
Governance Requirements for Derivatives Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission)
is adopting amendments to its rules to require derivatives clearing
organizations (DCOs) to establish and consult with one or more risk
management committees (RMCs) comprised of clearing members and
customers of clearing members on matters that could materially affect
the risk profile of the DCO. In addition, the Commission is adopting
minimum requirements for RMC composition and rotation, and requiring
DCOs to establish and enforce fitness standards for RMC members. The
Commission is also adopting requirements for DCOs to maintain written
policies and procedures governing the RMC consultation process and the
role of RMC members. Finally, the Commission is adopting requirements
for DCOs to establish one or more market participant risk advisory
working groups (RWGs) that must convene at least two times per year,
and adopt written policies and procedures related to the formation and
role of the RWG.
DATES: Effective July 13, 2023. DCOs must comply by July 12, 2024.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
(202) 418-5096, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581; Theodore Z. Polley III, Associate
[[Page 44676]]
Director, (312) 596-0551, [email protected]; or Joe Opron, Special
Counsel, (312) 596-0653, [email protected]; Division of Clearing and
Risk, Commodity Futures Trading Commission, 77 West Jackson Boulevard,
Suite 800, Chicago, Illinois 60604.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Amendments to Sec. 39.24(b)
III. Amendments to Sec. 39.24(c)
IV. Additional Comments
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth
core principles with which a DCO must comply in order to be registered
and to maintain registration as a DCO (DCO Core Principles),\1\ and
part 39 of the Commission's regulations implement the DCO Core
Principles. DCO Core Principle O requires a DCO to establish governance
arrangements that are transparent, fulfill public interest
requirements, and permit the consideration of the views of owners and
participants.\2\ Regulation Sec. 39.24 implements this aspect of Core
Principle O by providing minimum requirements regarding the substance
and form of a DCO's governance arrangements.
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\1\ 7 U.S.C. 7a-1.
\2\ See 7 U.S.C. 7a-1(c)(2)(O)(i).
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In August 2022, the Commission proposed several amendments to Sec.
39.24 to enhance the Commission's DCO governance standards (the
``Proposal'').\3\ The purpose of the Proposal was to further the
implementation of DCO Core Principle O, which requires a DCO to
establish governance arrangements that are transparent, fulfill public
interest requirements, and permit the consideration of the views of
owners and participants,\4\ by enhancing and standardizing DCO risk
governance requirements and improving participant involvement in DCO
risk management. The specific recommendations in the Proposal are
consistent with recommendations made in a report by the Central
Counterparty (CCP) Risk and Governance Subcommittee (Subcommittee) of
the Market Risk Advisory Committee (MRAC), a discretionary advisory
committee established by the authority of the Commission in accordance
with the Federal Advisory Committee Act, as amended.\5\ In the
Proposal, the Commission first proposed to require each DCO to
establish one or more RMCs and require the DCO to require its board to
consult with, and consider and respond to input from, its RMC(s) on
matters that could materially affect the risk profile of the DCO. The
Commission also proposed requirements related to the composition and
activities of RMCs. Second, the Commission proposed to require each DCO
to establish one or more RWGs in order to seek risk-based input (as
opposed to commercially-driven input) from a broader array of market
participants. The Commission also requested comment on the following
topics that the Commission might address in a future rulemaking: (1)
whether the Commission should require a DCO to consult with a broad
spectrum of market participants prior to submitting any rule change
pursuant to Sec. Sec. 40.5, 40.6, or 40.10; and (2) whether the
Commission should require a DCO to maintain policies and procedures
designed to enable an RMC member to share certain types of information
it learns in its capacity as an RMC member with fellow employees in
order to obtain additional expert opinion.
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\3\ Governance Requirements for Derivatives Clearing
Organizations, 87 FR 49559 (Aug. 11, 2022).
\4\ See 7 U.S.C. 7a-1(c)(2)(O)(i).
\5\ 5 U.S.C. App. 2; As explained in the proposing release, the
Subcommittee, which is comprised of DCOs, clearing members, and end
users, published a report outlining a series of recommendations to
enhance the Commission's DCO governance standards. This report
formed the basis for the Proposal. See MRAC CCP Risk and Governance
Subcommittee, Recommendations on CCP Governance and Summary of
Subcommittee Constituent Perspectives, available at https://www.cftc.gov/media/6201/MRAC_CCPRGS_RCCOG022321/download (Feb. 23,
2021).
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The comment period for the Proposal ended on October 11, 2022. The
Commission received 18 substantive comment letters.\6\ After
considering the comments, the Commission is adopting the Proposal
subject to certain changes, as noted below.
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\6\ The Commission received comment letters submitted by the
following: Barclays, BlackRock, Inc., Citigroup, Inc., Goldman Sachs
Group, Inc., JPMorgan Chase & Co., Societe Generale, T. Rowe Price,
UBS AG, and the Vanguard Group. (Barclays, et al.); BlackRock, Inc.
(BlackRock); Cboe Clear Digital, LLC (Cboe Digital); The Global
Association of Central Counterparties (CCP12); Citadel; CME Group,
Inc. (CME); Eurex Clearing AG (Eurex); Futures Industry Association
(FIA); ForecastEx LLC (ForecastEx); FTX US (FTX); Paolo Saguato,
Assistant Professor, George Mason University Antonin Scalia Law
School; Intercontinental Exchange, Inc. (ICE); Investment Company
Institute (ICI); International Swaps and Derivatives Association
(ISDA); North American Derivatives Exchange, Inc. (NADEX); Nodal
Clear, LLC (Nodal); The Options Clearing Corporation (OCC); and
Securities Industry and Financial Markets Association's Asset
Management Group (SIFMA AMG). All comments referred to herein are
available on the Commission's website, at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7304.
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II. Amendments to Sec. 39.24(b)
Regulation Sec. 39.24(b) sets forth requirements for a DCO's
governance arrangements. The Commission proposed to enhance these
requirements by requiring a DCO to: (1) establish one or more RMCs, and
require its board to consult with, and consider and respond to input
from, its RMC(s) on matters that could materially affect the risk
profile of the DCO; (2) appoint clearing members and customers of
clearing members to each RMC; (3) rotate RMC membership on a regular
basis; (4) establish one or more RWGs; and (5) establish written
policies and procedures regarding the RMC consultation process and the
formation and role of each RWG.
A. Establishment and Consultation of RMC--Sec. 39.24(b)(11)
i. Proposed Sec. 39.24(b)(11)
Proposed Sec. 39.24(b)(11) would require a DCO to maintain
governance arrangements that establish one or more RMCs,\7\ and require
a DCO's board of directors to consult with, and consider and respond to
input from, its RMC(s) on all matters that could materially affect the
risk profile of the DCO, including any material change to the DCO's
margin model, default procedures, participation requirements, and risk
monitoring practices, as well as the clearing of new products.\8\
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\7\ The Commission notes that some DCOs maintain separate RMCs
for each product type that they clear. For example, Chicago
Mercantile Exchange, Inc.'s Clearing House Risk Committee oversees
primarily futures and options products, and its Interest Rate Swaps
Risk Committee oversees interest rate swaps products. See CME,
Governance, accessed on February 3, 2022, available at https://www.cmegroup.com/education/articles-and-reports/governance.html.
\8\ RMCs are mentioned in existing Commission regulations (see,
e.g., Sec. 39.24(b)(7)) given that many DCOs already have them, but
current regulations do not explicitly require a DCO to establish an
RMC or prescribe the nature of its role.
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Barclays et al., BlackRock, CME, Eurex, FIA, ICE, ISDA, Nodal, OCC,
Paolo Saguato, and SIFMA AMG generally supported proposed Sec.
39.24(b)(11).\9\
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\9\ Eurex also stated that proposed Sec. 39.24(b)(11) aligns
with sections (1)-(3) of Article 28 of EMIR.
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However, CME suggested that the Commission modify proposed Sec.
39.24(b)(11) to specify that the board is required to consult with, and
consider and respond to ``risk-based'' input (as opposed to
commercially-driven input) from the RMC. CME argued that the Commission
should make clear its preference for risk-based input as
[[Page 44677]]
opposed to commercially-driven input because it is imperative to ensure
that market participants acting as RMC members, consistent with current
Commission regulations, prioritize the safety and efficiency of the DCO
and support the stability of the broader financial system.
FIA and SIFMA AMG recommended that the Commission modify proposed
Sec. 39.24(b)(11) to require an RMC to meet at least quarterly. FIA
further recommended that the Commission should require a DCO to provide
regular written risk reports to RMC members between RMC meetings. FIA
also suggested that the Commission should require an RMC to include the
following topics as standing agenda items: stress testing results,
sensitivity analysis, stress test scenarios review, back testing
results, collateral composition, and financial resources.
ForecastEx and NADEX expressed support for the concept of an RMC,
but argue that applying the proposed RMC requirements to DCOs that
clear only fully collateralized positions would serve no meaningful
purpose because they carry no credit risk, which, in turn, eliminates
or minimizes the significance of margin models, default procedures,
participation requirements, and risk management procedures.
ICE and OCC requested that the Commission clarify whether proposed
Sec. 39.24(b)(11) will provide a DCO with the option to structure its
RMC as either an advisory committee or as a board-level committee. ICE,
which operates four registered DCOs,\10\ argued that a DCO should be
able to choose either option, noting that some ICE DCOs have an
advisory RMC which makes recommendations to the board, while others
have a board-level RMC with responsibility delegated by the board for
governance and oversight over the DCO's risk management function. ICE
stated that the decision to establish an advisory RMC or a board-level
RMC depends upon each DCO's size, markets, business model, and other
regulatory requirements. OCC noted that it has delegated its risk
management responsibilities to several board-level committees, each
with a specific subject matter responsibility, that in most instances
make recommendations to the board and in some instances may act on
behalf of the board through delegated authority. OCC urged the
Commission to collaborate with the Securities and Exchange Commission
(SEC) to resolve what it believes to be a potential conflict between
proposed Sec. 39.24(b)(11), which OCC believes requires an RMC to be
an advisory committee, and recently proposed SEC regulations (SEC
Proposal),\11\ which OCC believes require an RMC to be a committee of
the board of directors.
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\10\ The four DCOs are ICE Clear Credit LLC, ICE Clear Europe
Limited, ICE Clear US, Inc., and ICE NGX Canada Inc.
\11\ In August 2022, the SEC proposed enhancements to its
governance requirements for central counterparties. See Clearing
Agency Governance and Conflicts of Interest, Securities Exchange Act
Release No. 34-95431 (Aug. 8, 2022), 87 FR 51812 (Aug. 23, 2022),
available at https://www.sec.gov/rules/proposed/2022/34-95431.pdf.
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OCC asked that the Commission clarify that a DCO would be permitted
under the proposed rules to delegate various risk management
responsibilities to multiple committees (e.g., an Audit Committee that
oversees legal and compliance risk, and a Technology Committee that
oversees information technology and security risks), rather than using
a single body labeled ``risk management committee,'' so long as those
bodies each satisfy the requirements of an RMC.
With regard to the non-exhaustive list of matters that could
materially affect the risk profile of the DCO included in proposed
Sec. 39.24(b)(11), ISDA recommended that the Commission add ``rule
enforcement policy [and] public information policy,'' while FIA
recommended that the Commission add ``outsourcing function, system
safeguards, access models, liquidity risk, financial resources, and
non-default procedures.''
Cboe Digital stated that the Commission should remove the list and
simply require DCOs to have policies and procedures for determining
whether a matter could affect the DCO's risk profile. It argued that
the list is broad and undefined, and added that if the Commission is
going to keep the list, that it should more narrowly define the
included matters. Specifically, Cboe Digital argued that it's not clear
whether a change to one of the included matters that is material but
not risk-based would still need to go to the RMC. OCC recommended
removing ``new products'' from the list of items that could materially
affect the risk profile of a DCO, but requested that if the Commission
retains the explicit reference to ``new products'' in the final rule,
it limit the requirement to new ``asset classes,'' or define a subset
of ``new products'' that would be captured by the final rule to include
only those that have margining, liquidity, default management, pricing,
or other risk characteristics that differ materially from those
currently cleared by the DCO.
The Commission agrees with CME that it is important to ensure that
market participants serving on an RMC provide risk-based input and
prioritize the safety and efficiency of the DCO and support the
stability of the broader financial system, rather than the commercial
interests of the firm they represent. For that reason, proposed Sec.
39.24(c)(3) requires a DCO to maintain policies designed to enable its
RMC members to provide independent, expert opinions in the form of
risk-based input (as opposed to commercially-driven input) on all
matters presented to the RMC for consideration.
However, there is a distinction between the substantive merits of
RMC members' input and their motivations for providing that input. A
DCO's board of directors cannot reliably determine whether input from
RMC members is motivated by the RMC members' views of the safety and
efficiency of the DCO and financial stability, or by the commercial
interests of the members' firms. Accordingly, the Commission declines
to modify proposed Sec. 39.24(b)(11) to require a DCO's board of
directors to only respond to risk-based input, as suggested by CME. In
the interest of transparency, a DCO's board must respond on the merits
to all substantive input from the RMC. If a DCO's board believes that
RMC input is incorrect or misguided on the merits, the board should
note that in its response.
In response to comments by FIA and SIFMA AMG suggesting that the
Commission should require an RMC to meet at least quarterly, the
Commission believes that an RMC would generally need to meet at least
quarterly to meet its obligation to consult with the board on all
matters that could materially affect the risk profile of the DCO, and
notes that many DCOs already require their RMC(s) to meet at least
quarterly.\12\
[[Page 44678]]
In an unusual circumstance in which the material risk issues facing the
DCO would allow for more than three months to pass between RMC
meetings, the Commission does not wish to impose a meeting on RMC
members that are already devoting significant time to advising the
board on risk issues. Therefore, the Commission declines to modify
proposed Sec. 39.24(b)(11) to add a requirement that each RMC convene
at least quarterly.
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\12\ The Commission notes that the risk committee charters of
CME, ICC and OCC require the committee to meet at least four times
per year, and the LCH Limited and LCH SA risk committee charters
require the committees to meet at least six times per year. Chicago
Mercantile Exchange, Inc., Clearing House Risk Committee Charter,
Sec. 3 (May 3, 2022), available at http://investor.cmegroup.com/static-files/7445789a-8aaa-46ec-8539-069e8cbf0fab; The Options
Clearing Corporation, Risk Committee Charter Sec. 3 (May 26, 2022),
available at https://www.theocc.com/getmedia/e71a4c1d-52dc-4c95-aeb1-98dab9159f41/risk_committee_charter.pdf.; LCH SA, Terms of
Reference of the Risk Committee of the Board of Directors, Sec. 2.4
(Sep. 9, 2020), available at https://www.lch.com/system/files/media_root/LCH%20SA%20-%20RiskCo%20ToRs.pdf; LCH Limited, Terms of
Reference of the Risk Committee of the Board of Directors, Sec. 2.4
(Jan. 4, 2023), available at https://www.lch.com/system/files/media_root/LCH-Limited-Risk-Commitee-Terms-of-Reference.pdf.
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The Commission also declines to adopt FIA's suggestion that the
Commission require a DCO to provide a regular written risk report to
RMC members between RMC meetings. While the Commission recognizes the
potential benefits of this practice, a DCO should have the flexibility
to determine the best method of communication with its RMC members to
ensure that they are adequately informed on material risk issues such
that they can provide effective input to the board. Similarly, the
Commission declines to require RMCs to have certain topics as standing
items on its agenda. The Commission believes that a DCO's RMC is in the
best position to identify the risks most pertinent to the DCO and
should have the flexibility to design its meeting agenda accordingly.
The Commission agrees with ForecastEx and NADEX that a DCO that
requires each of its clearing members to fully collateralize its
positions before a trade is executed has eliminated the credit risk
associated with those positions, which, in turn, eliminates or reduces
the significance of risk management issues including margin models,
liquidity risk management, guaranty funds, stress testing, default
procedures, and participation requirements. It is the Commission's
understanding that these are the primary topics on which RMCs and RWGs
contribute to DCO risk management. The Commission recognizes that fully
collateralized DCOs still face operational, legal, and other risks that
could materially affect the risk profile of the DCO. However, the
Commission believes that given the reduction of many risks facing these
DCOs, and the significant attendant reduction in issues for any RMC to
address, it is not appropriate to require these DCOs to assume the
costs associated with maintaining RMCs and RWGs that satisfy the
requirements of this final rule. As a result, the Commission believes
that the requirements to have an RMC and RWG are not appropriate for
fully-collateralized DCOs. Accordingly, the Commission is adopting new
Sec. 39.24(d) to provide that a DCO may satisfy the requirements of
paragraphs (b)(11), (b)(12), (c)(1)(iv), and (c)(3) of Sec. 39.24 by
having rules that permit it to clear only fully collateralized
positions. The Commission notes that this is consistent with the
carveouts from certain risk-related requirements that the Commission
previously provided to fully collateralized DCOs.\13\
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\13\ See Derivatives Clearing Organization General Provisions
and Core Principles, 85 FR 4800, 4803-4805 (Jan. 27, 2020).
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In response to comments by ICE and OCC asking the Commission to
clarify whether Sec. 39.24(b)(11) will provide a DCO with the option
to structure its RMC as either an advisory committee or as a board-
level committee, the Commission notes that proposed Sec. 39.24 seeks
to provide a DCO with flexibility to design its governance arrangements
in a manner that best fits its unique structure provided that it does
so in a manner that is consistent with the minimum requirements set
forth in Sec. 39.24, as amended by this final rule. Therefore, the
Commission confirms that a DCO may structure its RMC as either an
advisory committee or as a board-level committee to satisfy the
requirements of Sec. 39.24(b)(11).\14\ Moreover, in response to OCC's
inquiry, the Commission confirms that a DCO may delegate various risk
management responsibilities to multiple committees, rather than a
single body labeled ``risk management committee,'' so long as each
committee complies with the requirements of Sec. 39.24. The Commission
notes that the text of Sec. 39.24(b)(11), as proposed and adopted,
explicitly acknowledges the possibility of ``one or more'' risk
management committees.
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\14\ If a DCO structures its RMC as an advisory committee to
satisfy the requirements of Sec. 39.24(b)(11), it may also have a
separate board-level RMC comprised of members of the board of
directors.
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In response to comments on the non-exhaustive list of matters that
could materially affect the risk profile of the DCO included in
proposed Sec. 39.24(b)(11), the Commission continues to believe that
the proposed list provides DCOs with an appropriate level of guidance
to illustrate matters that require RMC consultation. In response to
comments by FIA and ISDA suggesting additional topics, the Commission
notes that the list of topics in Sec. 39.24(b)(11) is meant to be
illustrative, not exhaustive, and that all matters that could
materially affect the risk profile of the DCO are subject to the
consultation requirement, regardless of whether they fit in a listed
category. Therefore, it is not necessary to endeavor to include all
potential categories of issues that could materially affect the risk
profile of the DCO. In response to Cboe Digital's request that the
Commission clarify whether a material change to one of the matters
included on the list that does not involve risk issues would still need
to go to the RMC, the Commission notes that such a change would not
necessarily be subject to the consultation requirement; a board is only
required to consult with its RMC(s) on matters that could materially
affect the risk profile of the DCO.
ii. Request for Comment--New Products
The Commission also requested comment on whether a DCO's proposal
to clear a new product should be categorically treated as a matter that
could materially affect the DCO's risk profile for purposes of the
proposed Sec. 39.24(b)(11) RMC consultation requirement given the
potential for novel and complex risks associated with clearing new
products. If so, the Commission requested comment on whether it should
define what constitutes a new product for this purpose, and how should
it do so. The Commission further questioned whether it should define
new products to include, for example, those that have margining,
liquidity, default management, pricing, or other risk characteristics
that differ from those currently cleared by the DCO, or, in the
alternative, should require DCOs to adopt policies defining what
constitutes a new product.
In response, BlackRock, Cboe Digital, CCP12, CME, Eurex, FTX, ICE,
NADEX, Nodal, and OCC commented that a new product should not be
treated categorically as a matter that could materially affect the
DCO's risk profile. Several of these commenters (Eurex, Nodal, Cboe
Digital, CCP12, NADEX, OCC) noted that many new contracts are simply
extensions of, or are substantially similar to, existing contracts.
CME, CCP12, Eurex, ICE, and Nodal stated that categorically treating
new products as a matter that could materially affect the DCO's risk
profile could lead to delays in product launches and unnecessary
administrative burden. OCC argued that a categorical definition of new
products is incompatible with OCC's unique obligation, as the only
listed equity option clearinghouse, to clear an option on an underlying
equity within one day after receipt of notification of a registered
options exchange's intent to list such option.\15\
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\15\ In support of this assertion, OCC cited generally to its
``Plan for the Purpose of Developing and Implementing Procedures
Designed to Facilitate the Listing and Trading of Standardized
Options Submitted Pursuant to Section 11A(a)(3)(B) of the Securities
Exchange Act of 1934, available at https://ncuoccblobdev.blob.core.windows.net/media/theocc/media/clearingservices/services/options_listing_procedures_plan.pdf.
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[[Page 44679]]
CCP12 and CME argued that applying the RMC consultation requirement
to all new products would be contrary to congressional intent. They
noted that the Commodity Futures Modernization Act of 2000 amended the
CEA to allow designated contract markets (DCMs) to self-certify new
products and list them the next business day.\16\ The purpose of this,
they argued, was to promote the ability of DCMs to innovate and respond
quickly to competitive conditions in fast-changing markets subject to
Commission oversight. CME further argued that Congress reaffirmed its
support of a streamlined approach to new products in the 2010 Dodd-
Frank Wall Street Reform and Consumer Protection Act, when it
instituted a 10-day review period for rule submissions \17\ but left
the review period for product certifications unchanged. CME further
noted that DCMs have the primary responsibility for listing new
products. While CME acknowledged that a DCO is part of that process and
needs to consider new products in light of its product eligibility
requirements and risk management framework, CME argued that making the
DCO bring all new products through an RMC consultation process would
dramatically change a DCO's role by creating a two-track regulatory
process, with the DCO's process being more onerous.
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\16\ See 7 U.S.C. 7a-2(c)(1).
\17\ See 7 U.S.C. 7a-2(c)(2).
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ISDA commented that while not all new products will add risk to a
DCO, all new products should be submitted to the RMC so it can
determine whether board consultation is necessary.
Eurex noted that requiring consultation only with respect to new
products that could materially affect the risk profile of the DCO would
harmonize with EMIR Article 28(3), which requires a risk committee to
advise on the clearing of new classes of instruments. Eurex stated that
it believes that if a DCO already clears a certain class of
instruments, clearing a new product within that class would not have a
material impact on the DCO's risk profile.
BlackRock, Cboe Digital, FIA, ICE, OCC, and SIFMA AMG provided
suggestions on how to define new products for purposes of the proposed
Sec. 39.24(b)(11) RMC consultation requirement. FIA and SIFMA AMG
agreed with the list of factors identified in the request for comment
(different margining, liquidity, default management, pricing, or other
risk characteristics from products already cleared) and further
recommended that the Commission include factors from opinions published
by the European Securities and Markets Authority (ESMA).\18\ BlackRock
stated that if the Commission were to provide guidance on how to define
a new product, it should include limited availability of pricing
sources, the addition of a new asset class, or the introduction of
exceedingly long tenors. ICE stated that while it thinks DCOs are in
the best position to define what constitutes a new product, if the
Commission were to provide guidance, it should focus the definition on
new classes of products, and agreed with the factors identified in the
Commission's request for comment. OCC stated that the Commission should
limit the definition of ``new products'' to new ``asset classes,'' or
define ``new products'' using the factors identified in the
Commission's request for comment.
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\18\ See ESMA Opinion on Article 15 and 49: Common Indicators
for New products and Services Under Article 15 and for Significant
Changes Under Article 49 of EMIR, available at https://www.esma.europa.eu/document/opinion-common-indicators-new-products-and-services-under-article-15-and-significant.
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Cboe Digital, CCP12, Eurex, and ICE believe that DCOs are the best
judge of what constitutes a new product and stated that many already
have policies and procedures in place within their governance
arrangements that define what constitutes a new product from a risk
management perspective. Cboe Digital commented that the Commission
should, instead of categorically treating new products as a matter that
could materially affect the DCO's risk profile, require a DCO to
establish policies and procedures to determine if a new product or a
material change to a new product could materially impact risk. Cboe
Digital further commented that if the Commission treats the clearing of
a new product as a matter that must be categorically treated as
materially affecting a DCO's risk profile, it should seek to harmonize
the definition of a new product with the relevant definitions under
part 40 of the Commission's regulations.
OCC stated that the proposed rule is also potentially inconsistent
with governance-related aspects of other Commission rules that require
a DCO to have ``appropriate requirements'' for determining the
eligibility of contracts for clearing, including the consideration of
the ``[o]rganizational capacity of the [DCO] and clearing members to
address any unusual risk characteristics of a product.'' The Commission
notes that OCC did not identify the inconsistency. Moreover, the
Commission notes that Regulation Sec. 39.12(b)(vii) requires a DCO to
consider the ``operational'' (not ``organizational'') capacity of the
DCO and its clearing members to address any unusual risk
characteristics of a product.
As previously noted, the Commission proposed to require a DCO's
board to consult with its RMC if the launch of a new product
constitutes a matter that could materially affect the risk profile of
the DCO. However, the Commission requested comment on whether it should
alternatively require board consultation for products that meet a new,
to be added, definition of ``new products,'' and, if so, how the
Commission should define ``new products'' for this purpose. After
considering the comments, the Commission continues to believe that the
Proposal's requirement that a DCO's board consult with its RMC if the
launch of a new product constitutes a matter that could materially
affect the risk profile of the DCO is appropriate. The Commission
recognizes that many new contracts are substantially similar to
existing contracts, and therefore requiring a DCO's board to consult
with the RMC on all new products could result in unnecessary
administrative costs and delays in launching new products. Moreover,
the Commission agrees with the several commenters that stated that DCOs
are uniquely situated to determine what constitutes a new product. The
Commission notes that Sec. 39.24(b)(11)(i) will require DCOs to
maintain written policies and procedures regarding the RMC consultation
process, which includes policies and procedures for determining which
matters could materially affect a DCO's risk profile. The Commission
also expects each DCO to define in its policies and procedures what it
means to ``materially affect the risk profile of the DCO.'' The
Commission believes that the list of factors it identified in the
request for comment for determining whether a new product could
materially affect the risk profile of the DCO (different margining,
liquidity, default management, pricing, or other risk characteristics
from products already cleared) are a good starting point for DCOs as
they draft or update their policies and procedures in this area.
The Commission noted some confusion in the comments regarding
whether the Proposal required board consultation with the RMC for all
new products, or only for those that could materially affect the risk
profile of the
[[Page 44680]]
DCO. To make it clear in the rule text that the requirement is the
latter, the Commission is revising Sec. 39.24(b)(11) to state that the
board must consult with its RMC(s) on the previously enumerated items
``as well as the clearing of new products that could materially affect
the risk profile of the derivatives clearing organization'' (added text
in italics).
B. Policies and Procedures Governing RMC Consultation--Sec.
39.24(b)(11)(i)
i. Proposal
Proposed Sec. 39.24(b)(11)(i) would require a DCO to maintain
written policies and procedures to make certain that its RMC
consultation process is described in detail, and includes requirements
for the DCO to document the board's consideration of and response to
RMC input.
BlackRock, CCP12, Eurex, Nodal, and SIFMA AMG supported proposed
Sec. 39.24(b)(11)(i). Eurex noted that the proposed rule broadly
aligns with Article 28(2) of EMIR and Article 15 of EU regulation 153/
2013.
OCC argued that if a board of directors has delegated its risk
management responsibilities to a board-level committee, there is no
longer a need for the board to consult with and issue a response to
that committee.
BlackRock stated that a DCO's board should be required to respond
to the substance of the input it receives rather than merely
acknowledging the input was received. Doing so, it said, will bolster
the effectiveness of RMCs and the board and will ultimately enhance
market resiliency. SIFMA AMG commented that it is important that a
board's response to the recommendation of the RMC, which should include
the board's rationale for its decision, be shared with market
participants to help inform their own decisions to continue to clear
with that DCO, especially at DCOs where risk is mutualized across
clearing members and clearing member customers. CCP12 and Nodal stated
that DCOs should have discretion as to how to best document a board's
consideration of and response to input from the RMC. They argued that
proposed Sec. 39.24(b)(11)(i) permits DCOs to choose the best method
of documentation and should not be revised to constrain the acceptable
forms of meeting the documentation requirement.
The Commission continues to believe that explicitly requiring DCOs
to develop and maintain policies and procedures governing DCO
consultation with its RMC(s), and to document the board's consideration
of and response to RMC input, will promote transparency,
accountability, and predictability, and facilitate effective oversight
by the Commission in this area.
In response to OCC's comment, the Commission agrees that if a board
of directors has delegated responsibility to a board-level RMC to make
certain risk decisions, then it has eliminated the need for the board
to consult with the RMC with respect to those decisions.
The Commission confirms that the requirement that a DCO document
the board's consideration and response to RMC input requires a board to
respond to the substance of the input it receives rather than merely
acknowledging that input was received. However, the Commission declines
to adopt a requirement that would make a DCO share its response to RMC
input with all market participants. The Commission recognizes that some
risk-related discussions may involve sensitive information that a DCO
may not wish to share broadly. Moreover, the Commission notes that
Sec. 39.21(a) already requires DCOs to provide market participants
with sufficient information to enable the market participants to
identify and evaluate accurately the risks and costs associated with
using the services of the DCO.\19\
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\19\ 17 CFR 39.21(a).
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ii. Request for Comment--RMC Meeting Minutes
The Commission requested comment on whether DCOs should be required
to create and maintain minutes or other documentation of RMC meetings.
In response, BlackRock, FIA, ISDA, and NADEX stated that RMCs
should be required to keep minutes. BlackRock argued that keeping
minutes is necessary to promote transparency, accountability, and
predictability, and facilitate effective oversight by the Commission in
this area. ISDA stated that minutes of RMCs should be made available to
RMC members and shared with the board and regulators. It argued that
because the decisions made at the RMC meetings have an impact on a wide
variety of market participants, DCOs should produce a summary that is
made public and that does not include confidential information.
In response to the comments, the Commission is revising proposed
Sec. 39.24(b)(11)(i) to require a DCO to maintain written policies and
procedures to make certain that ``the [RMC] consultation process is
described in detail, and includes requirements for the [DCO] to
document the board's consideration of and response to risk management
committee input and create and maintain minutes of each [RMC] meeting''
(added text in italics). The Commission agrees with BlackRock that
requiring RMC meeting minutes will promote transparency,
accountability, and predictability, and facilitate effective oversight
by the Commission in this area. In response to ISDA's suggestion that a
DCO should be required to publish a public summary of RMC meetings, the
Commission declines to adopt such a requirement at this time in order
to preserve a DCO's ability to protect sensitive information, but notes
that Sec. 39.21(c)(9) requires public disclosure of information that
is relevant to participation in the clearing and settlement activities
of the DCO.\20\
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\20\ 17 CFR 39.21(c)(9).
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C. Representation of Clearing Members and Customers on RMC--Sec.
39.24(b)(11)(ii)
Proposed Sec. 39.24(b)(11)(ii) would require a DCO to maintain
policies to make certain that an RMC includes representatives from
clearing members and customers of clearing members. The Commission
requested comment on whether it should adopt additional specific
composition requirements, and if so, what those requirements should be.
Barclays, et al., BlackRock, CME, Eurex, FIA, ICE, ISDA, and SIFMA
AMG generally supported the proposal to require that an RMC includes
representatives from clearing members and customers of clearing
members.
SIFMA AMG recommended that the Commission require no fewer than
three clearing members and three clearing member customers on an RMC,
and, if the overall RMC membership is ``especially large,'' that
clearing member and customer participation must represent a
``meaningful component'' of the RMC. ISDA questioned whether the
proposed rule will be adequate to ensure sufficient industry input and
challenge, and proposed an alternative rule requiring a DCO to have RMC
members that ``cover a wide variety of organizations and roles,'' with
no fewer than eight external members, at least 50 percent of which are
clearing members.
Cboe Digital and NADEX did not support requiring an RMC to include
more than one clearing member. Cboe Digital argued that the proposed
rule is overly prescriptive and does not account for the differences in
size and offerings across DCOs. It argued that the Commission should
only require a DCO to have at least one clearing member representative
on its RMC, and that a DCO should be permitted to establish a policy
that additional clearing member
[[Page 44681]]
RMC representatives should proportionately represent the number of
clearing members of (or products offered by, if applicable) the DCO.
NADEX stated that the proposed rule would not be appropriate for all
DCOs because, for example, a newly registered DCO may only have one
clearing member, which would make it unable to include multiple
clearing members on an RMC.
Cboe Digital, CCP12, NADEX, Nodal, and OCC did not support the
proposed requirement that an RMC also include customers of clearing
members and instead supported a principles-based approach that allows a
DCO to decide which governance body should have customer
representation. Nodal argued that requiring customers of clearing
members to be on the RMC could chill dialogue between clearing members
and DCOs. For example, a clearing member might choose not to express
valid concerns regarding a particular product in front of a customer
that may be interested in trading that product, due to the concern that
the customer may seek to shift its trading to a different clearing
member that is more supportive of the new product. In addition, Nodal
stated that it would be difficult to obtain truly independent opinions
on risk management matters from clearing members and customers of
clearing members, and that the Commission should implement different
RMC composition requirements as a result. OCC noted that ``customers''
is not a homogenous group and at certain DCOs it may be impossible to
ensure each type of customer group is represented. OCC further noted
that customers are not subject to direct mutualization; therefore, it
may be difficult to ensure that they are not unduly motivated by their
commercial interests. Cboe Digital argued that clearing members are
much better suited than their customers to inform DCO risk management
frameworks because their expertise, business purposes, and operational
structure center around clearing risk and operations in order to fulfil
their role of processing, clearing, and settling trades through a DCO,
in contrast to customers whose operations can vary widely and do not
necessarily focus on clearing operations or risk management.
In response to the Commission's request for comment on whether it
should adopt additional specific RMC composition requirements,
BlackRock stated that the Commission should adopt further specific
requirements. BlackRock gave as an example that, for members, DCOs
could require that a minimum percentage of initial margin is
represented across a minimum number of participants, setting such
parameters to ensure that a meaningful level of risk is represented
while preventing dominance by a handful of firms. FIA recommended that
the Commission consider requiring RMCs to include DCO representatives,
which would include, at a minimum, the President (or a designee) and
the Chief Risk Officer. To harmonize with Article 28 of EMIR, FIA
recommended that the Commission require that: (1) a number of
independent members of the board of directors with the appropriate
level of skills and expertise serve on the RMC; (2) the chair of the
RMC be an independent member of the board; and (3) no group represented
(clearing members, customers of clearing members, DCO and independent
directors) have a majority. ICI recommended requiring DCOs to have a
``meaningful proportion'' of customers on their RMCs, and recommended
that the Commission set forth selection parameters that would ensure a
cross-section of customers are included. ForecastEx stated that the
Commission should prohibit affiliates of a DCO from serving as members
of an RMC.
NADEX argued that proposed Sec. 39.24(b)(11)(ii) should not apply
to ``retail-focused'' DCOs. NADEX stated that for its retail-focused
DCO, it should suffice to maintain a ``contact us'' page on its website
with an email address, physical address, and live chat option for
market participants to provide feedback. NADEX argued that, unlike
traditional DCOs in which clearing members generally have expertise in
the financial industry and risk management, the overwhelming majority
of NADEX's customers are not industry professionals. Instead, they are
often new to the industry, lack operational risk management experience,
have no ownership or financial stake in the DCO, and require time and
education to become acquainted and comfortable with self-directed
transactions in short-term derivatives. NADEX also noted that the
Commission stated in 2019 when considering proposed rules to define the
term ``market participant'' for the purpose of board composition
requirements that the Commission was ``sympathetic to [NADEX's]
concerns that the burden and cost of including market participants that
are primarily retail and not exposed to the risk of lost margin or the
default of the DCO's other customers may not be warranted for fully
collateralized, non-intermediated DCOs.'' NADEX requested the
Commission consider an amended definition of ``market participant'' to
substitute for the proposal's use of ``clearing member'' and ``customer
of a clearing member'' that would allow the DCO discretion to operate
in a manner best suited to its business model. Alternatively, NADEX
proposed that any retail-focused DCO be exempt from this requirement in
the event the new regulation is adopted as proposed.
Eurex noted that the proposed requirement is consistent with
Article 28(1) of EMIR, which requires that a CCP's risk committee be
composed of representatives of its clearing members, independent
members of the board, and representatives of its clients. Eurex further
noted that EMIR Article 28(1) specifies that none of the groups of
representatives may have a majority in the risk committee. However,
Eurex believes that that the Commission's proposal strikes the right
balance and does not need this further requirement.
Finally, OCC noted that proposed Sec. 39.24(b)(11)(ii) requires an
RMC to include ``clearing members and customers of clearing members,''
while the SEC Proposal requires an RMC to include ``representatives
from owners and participants.'' OCC argued that while these terms are
not directly inconsistent, the distinction supports the view that the
intended meaning and role of the RMC amongst the CFTC and SEC is
inconsistent.
After considering the comments, the Commission is modifying
proposed Sec. 39.24(b)(11)(ii) to clarify that the rule requires a DCO
to maintain written policies and procedures to make certain that its
RMC includes at least two clearing member representatives and at least
two representatives of customers of clearing members.
The Commission is not making any substantive changes to proposed
Sec. 39.24(b)(11)(ii). The Commission continues to believe that
ensuring a minimum level of clearing member and customer representation
on RMCs will further the purpose of Core Principle O by providing a
consistent, formalized process across all DCOs to solicit, consider,
and address input from clearing members and customers before making
decisions that could materially affect the risk profile of the DCO. The
Commission also continues to believe that the rule as proposed provides
appropriate flexibility to account for differences among DCOs in terms
of size, business models, resources, and governance structure.
Therefore, the Commission declines to adopt the proposals put forth by
ISDA and SIFMA AMG that would increase the minimum number of required
market participants, and the proposals put forth by Cboe Digital and
NADEX to reduce the number of required clearing members.
[[Page 44682]]
In response to NADEX's comment that the proposed rule would not be
appropriate for all DCOs because, for example, a newly registered DCO
may only have one clearing member, which would make it unable to
include multiple clearing members on an RMC, the Commission notes that
Regulation Sec. 1.3 defines a clearing member as ``any person that has
clearing privileges such that it can process, clear and settle trades
through a derivatives clearing organization on behalf of itself or
others.'' \21\ Therefore, a DCO with one clearing member is only
possible if a DCO has a single FCM clearing member that clears for all
other participants clearing through the DCO, which is not the case at
any DCO registered with the Commission. In the event that a DCO had a
single FCM clearing member, and no direct clearing members from which
to draw RMC members, it could comply with the composition requirement
by having multiple representatives from its single clearing member on
its RMC. While DCOs will generally benefit from selecting RMC members
with the differing perspectives that result from working at different
firms, a DCO would not have the ability to do so in this case.
Similarly, the Commission notes that a DCO may have only direct
clearing members and no customers from which to draw RMC members and
therefore would be unable to satisfy the composition requirement with
regard to representatives of customers of clearing members. In
recognition of this, the Commission is modifying the text of Sec.
39.24(b)(11)(ii) so that a DCO is only required to include on its RMC
``if applicable, at least two representatives of customers of clearing
members'' (added text in italics).
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\21\ 17 CFR 1.3.
---------------------------------------------------------------------------
The Commission has considered the comments opposed to customer
representation on an RMC, and continues to believe that the benefits of
requiring customer representation on an RMC outweighs the potential
costs. Customers provide a perspective on risk management issues that
is different from that of the DCO and its clearing members, and as
important stakeholders with a financial stake in the integrity of the
DCO, they deserve an opportunity to provide input on topics such as the
protection of customer assets and collateral at the RMC level, where
key risk discussions take place. The Commission also disagrees with
Nodal's argument that it would be difficult to obtain independent
opinions on risk management matters from clearing members and customers
of clearing members. In the Commission's experience, it is common
practice that RMC members provide effective risk-based input directed
at the safety of the DCO.
After considering the responses to the Commission's request for
comment, the Commission does not believe that it is necessary to adopt
further specific requirements regarding RMC composition at this time.
As noted above, the Commission believes that it is important to provide
DCOs with a degree of flexibility in their RMC composition to account
for differences among DCOs in terms of size, business models,
resources, and governance structure.
In response to NADEX's suggestion that the proposed requirement
should not apply to ``retail focused'' DCOs, the Commission does not
believe that ``retail focused'' is a meaningful distinction in this
context. As previously discussed, some DCOs exclusively clear fully
collateralized products, and the Commission agrees that because full
collateralization addresses many critical risk issues, a fully
collateralized DCO and its participants would not necessarily benefit
from having an RMC. Any DCO that offers margined products, on the other
hand, whether retail focused or not, must be able to manage the risks
of margined products, and should have participants capable of providing
meaningful input on the risk topics addressed by the RMC.
Finally, in response to OCC's comment noting that proposed Sec.
39.24(b)(11)(ii), which requires an RMC to include ``clearing members
and customers of clearing members,'' and the SEC Proposal, which
requires an RMC to include ``representatives from owners and
participants,'' are not the same, the Commission acknowledges that the
requirements are different, but does not believe this presents any
issues in the ability of a dually-registered entity to comply with both
requirements.
D. Rotation of RMC Membership--Sec. 39.24(b)(11)(iii)
The Commission proposed new Sec. 39.24(b)(11)(iii), which would
require a DCO to maintain policies to make certain that membership of
an RMC is rotated on a regular basis. The Commission also requested
comment on whether it should set a minimum frequency for RMC membership
rotation, the advantages and disadvantages of doing so, and, if it does
set a rotation frequency requirement, what that frequency should be.
Eurex and NADEX do not believe that the Commission should adopt
proposed Sec. 39.24(b)(11)(iii), arguing that depending on the size of
the DCO and the qualifications of its participants to serve on an RMC,
there may not be enough individuals suitable and interested in serving
on the committee to rotate regularly. Eurex further argued that the
proposed requirement does not align with EU regulation, which affords
CCPs the discretion to determine their nomination, renomination, and
rotation policies.
BlackRock, Cboe Digital, CCP12, CME, ISDA, Nodal, OCC, and Paolo
Saguato support proposed Sec. 39.24(b)(11)(iii), but do not support
the Commission establishing a minimum frequency for RMC membership
rotation. CCP12 and OCC stated that the importance of continuity and
expertise as a means of effectively managing liquidity or credit risks
(and ultimately supporting the stability of the broader system)
outweighs any governance benefits resulting from a minimum rotation
frequency requirement, particularly in the case of DCOs that are
systemically important. CCP12, CME, FIA, and Nodal stated that DCOs
have members of their risk committees with specialized knowledge of the
DCO's risk practices and/or particular products, and such expertise
would be hard to replace. BlackRock, FIA, ISDA, and Paolo Saguato
stated that DCOs should be allowed to stagger RMC membership rotation.
ForecastEx noted that in the case of a DCO with most of its activity
coming from a few clearing members, it may be more beneficial from a
risk management perspective to ensure that the larger clearing members
are represented on the RMC for longer periods of time. OCC stated that
if the Commission imposes a rotation requirement, it should clarify
that independent directors are not subject to the requirement and that
the rotation requirement applies to persons, not the firms they
represent. ISDA noted that many DCO RMCs include representatives of
management, for example the Chief Risk Officer. ISDA suggested that the
rule should only require a DCO to rotate RMC representatives external
to the DCO.
FIA stated that the terms of an RMC should not restrict or limit
appointed members' tenure. However, FIA supports DCOs defining
transparent criteria for RMC membership, such as clearing expertise,
market and asset class expertise, etc., and rotating on the basis of
these relevant criteria.
ISDA proposed a minimum length of membership of two years to
account for the large amount of information a new RMC member needs to
process, and the resulting time required to get up to
[[Page 44683]]
speed and become a valuable resource for the DCO. ISDA also suggested
that it may be appropriate to institute a cap that would prevent RMC
members from staying on for more than five consecutive years.
SIFMA AMG recommended that the Commission require that clearing
member and customer representatives be grouped for purposes of
establishing a staggered rotation. For example, if a DCO chose to have
a minimum of three RMC members from each group and a three-year
rotation, the DCO could stagger their rotation to ensure continuity of
expertise.
ICE stated that prescriptive requirements on the rotation of RMC
members also would impose a significant burden on market participants
to supply appropriately experienced, knowledgeable, and available
employees to participate on the RMCs, as firms may lack or be unwilling
to commit resources to provide new individuals for rotation. ICE
contended that should such requirements be imposed on DCOs, it may be
appropriate for the Commission to, in parallel, impose requirements on
market participants to supply the required amount of appropriately
experienced employees to participate on RMCs. As the obligation to
manage the risks of the DCO resides exclusively with the DCO, ICE
believes the DCO has a strong incentive and is best suited to make
determinations on RMC membership.
ICE and OCC stated that it is unclear whether the proposed
requirement on RMC ``rotation'' is consistent with the SEC Proposal
requiring RMC ``reconstitution.''
The Commission continues to believe that requiring a DCO to
regularly rotate its RMC membership will promote the ability of
clearing members and customers of clearing members from a broad array
of market segments to provide their expertise, and will ensure that the
RMC provides the DCO with varied perspectives on risk management
matters. After reviewing the responses to the Commission's request for
comment, the Commission declines to prescribe a minimum frequency for
RMC member rotation. The Commission recognizes that there are risk
management benefits associated with retaining RMC members who have
specialized knowledge of a DCO's operations, risk practices, and/or
particular products, and that it may be difficult to replace those
members. A DCO may also choose to establish one or more ex officio
management positions on its RMC, such as the DCO's president or chief
risk officer, which it would not need to rotate off of the RMC. The
Commission further recognizes that DCOs may also benefit from
staggering their rotation and requiring different rotation frequencies
for different classes of members. In response to a request by OCC that
the Commission carve out an exception for independent directors from a
DCO's board who serve on an RMC, the Commission notes that OCC did not
explain a need for such a carve-out, and the Commission declines to
provide an exception for independent directors from the rotation
requirement at this time.\22\
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\22\ The Commission notes that this concern seems most relevant
to an RMC that is structured as a board-level committee.
---------------------------------------------------------------------------
The Commission also notes that in certain circumstances it may be
appropriate to rotate a specific RMC member, but not the firm they
represent, selecting another individual from the same firm to serve on
the RMC. For example, a DCO may make this determination when a
significant percentage of contracts cleared on the DCO are cleared by a
relatively small number of clearing members. In response to ICE's
comment that firms may lack or be unwilling to commit resources,
specifically appropriately experienced, knowledgeable, and available
employees, to meet the proposed rotation requirement, the Commission
believes that, based on current participation in RMCs and the interest
in participation expressed through the Commission's MRAC, there is
adequate interest. In response to ICE and OCC's statement that it is
unclear whether the proposed requirement on RMC ``rotation'' is
consistent with the SEC's proposal requiring RMC ``reconstitution,''
the Commission, after reviewing proposed SEC Rule 17Ad-25(d)(1),
believes that the provisions are consistent and focused on the same
goals.
After reviewing the comments, the Commission is adopting Sec.
39.24(b)(11)(iii) as proposed. As discussed above, the Commission
believes that the rule will provide a DCO with the flexibility to
choose how to design its policies for RMC membership rotation provided
that the DCO's policies and procedures provide for varied perspectives
on risk management matters.
E. Establishment of RWG To Obtain Input--Sec. 39.24(b)(12)
Proposed Sec. 39.24(b)(12) would require a DCO to establish one or
more RWGs as a forum to seek risk-based input from a broad array of
market participants, such that a diverse cross-section of the DCO's
clearing members and customers of clearing members are represented,
regarding all matters that could materially affect the risk profile of
the DCO. In addition, proposed Sec. 39.24(b)(12) would require a DCO
to maintain written policies and procedures related to the formation
and role of each RWG, and require that each RWG convene at least
quarterly.
The Commission requested comment on whether the proposed
requirement that each RWG convene quarterly is the appropriate
frequency. The Commission also requested comment on whether it should
require a DCO to document the proceedings of RWG meetings, considering
both the transparency and accountability benefits of such a requirement
and the potential impact of a documentation requirement on free and
open dialogue.
Barclays, et al., BlackRock, CCP12, CME, Nodal, OCC, Paolo Saguato,
and SIFMA AMG generally supported the Commission's proposal to require
a DCO to establish one or more RWGs. SIFMA AMG recommended that the
Commission clarify that the matters required to be brought to the RWG
are the same scope of matters to be brought to the RMC.
Cboe Digital, Eurex, ForecastEx, NADEX, and Nodal expressed
concerns with the proposed requirement. Cboe Digital argued that
requiring use of an RWG for a smaller DCO, or a DCO with a homogenous
product offering, would be arbitrary, burdensome, and superfluous given
the functions of the DCO's RMC. Eurex noted that proposed Sec.
39.24(b)(12) is not harmonized with EMIR or EU Regulation 152/2013,
which leave the establishment of further committees beyond the risk
committee to the discretion of the CCP. Moreover, Eurex argued that the
decision to establish additional committees or working groups beyond an
RMC for the purposes of gathering risk-based input should be left to
the discretion of the DCO. Eurex also stated that if the Commission
chooses to adopt Sec. 39.24(b)(12), it should allow DCOs to design
their own policies and procedures regarding membership rotation. Nodal
commented that the material difference between the RMC and the RWG is
unclear and, therefore, questioned what additional risk management
value is gained from requiring an RWG in addition to an RMC. NADEX
stated that the proposed regulation should not be implemented because a
DCO is in the best position to determine its governance needs based on
its specific business and size. Moreover, it argued that it may be
difficult for smaller DCOs to find
[[Page 44684]]
members for a second committee beyond their RMC. ICE noted that it
faces challenges in finding available resources at firms to engage in
various committees and advisory roles given the resource constraints
currently present in the industry, and argued that because the proposed
rules create various additional overlapping opportunities for input
such as the RMC and RWG, these limited resources may be further
strained.
The Commission received several comments on the proposed
requirement that each RWG convene at least quarterly. FIA and ISDA
agreed with the proposed requirement, but CCP12, CME, Eurex, ICE,
Nodal, OCC, and SIFMA AMG do not believe it is necessary for the
Commission to prescribe a minimum frequency of RWG meetings. Nodal
suggested that the Commission could revise proposed Sec. 39.24(b)(12)
to provide that the RWG shall be convened by the DCO prior to the DCO
making changes that could materially affect the risk profile of the
DCO. BlackRock stated that the Commission should require RWGs to meet
bi-annually, or more frequently if warranted by the risk issues at the
DCO.
The Commission also received several comments on whether the
Commission should require DCOs to document the proceedings of RWG
meetings. CME believes that requiring and publishing meeting minutes
may chill open dialogue and impede progress on addressing risk issues.
According to CME, a DCO should be able to determine whether to document
RWG proceedings and, if so, the manner in which to do so. CCP12
believes that the Commission should only require a DCO to document the
topics discussed by the RWG. SIFMA AMG stated that an RWG should be
required to document its recommendations to the RMC or board, but not
its discussions generally. ISDA stated that DCOs should document each
RWG meeting because of the transparency and accountability benefits,
and also to allow members of the group that miss a meeting to
efficiently participate in the next meeting. ISDA further argued that a
DCO could mitigate any potential impact on free and open dialogue by
limiting the information in the meeting minutes to discussion topics
and points that were made by participants, omitting the identity of
those who made the points. According to ISDA, the minutes should also
contain areas of disagreement and document any agreement or decision
made on the discussed topics. FIA stated that it supports the
requirement that a DCO document the proceedings of RWG meetings. FIA
does not believe that such a requirement will chill discussion within
the RWG, but instead will create a record of matters discussed and
general feedback provided. Moreover, FIA believes that the Commission
should require that this documentation be provided to the RMC as an
input for consideration.
FIA believes that the firms represented on the RWG should provide
risk-based feedback, but also that firms should be able to use this
forum to provide views and feedback without being limited to the
structural formality of the RMC. FIA views the RWG primarily as a forum
to provide transparency to market participants and to allow them to
engage in open dialogue so the DCO obtains the views of its members and
their customers. BlackRock suggested that the role of the RWG could be
further enhanced if RMCs were explicitly required to consider feedback
from the RWG(s).
After considering the comments, the Commission is adopting Sec.
39.24(b)(12) largely as proposed, but is revising it with respect to
the required meeting frequency for RWGs and with respect to meeting
documentation requirements discussed below. A requirement of a
quarterly RWG meeting may be unduly burdensome for a DCO that is not
confronted with issues materially affecting its risk profile that would
require RWG consultation at a given time. It is also important,
however, that an RWG hold regular meetings to ensure that it serves as
a consistent forum for members to discuss and provide input on risk
matters facing a DCO in a timely manner. As a result, the Commission is
revising Sec. 39.24(b)(12) to require that each RWG ``shall convene at
least two times per year.''
In response to Nodal's questioning of the material differences
between the RMC and the RWG, and the additional risk management value
in requiring an RWG in addition to an RMC, the Commission continues to
believe that establishing one or more RWGs will enhance a DCO's risk
management by providing the DCO with an expanded pool of participants
to seek input from when considering matters that could materially
affect the risk profile of the DCO. Some participants with valuable
risk management insight may be reluctant to serve on an RMC due to the
time commitment involved and thus may prefer to serve on an RWG.
The Commission recognizes that a smaller DCO, in particular, may
have a more difficult time finding participants to serve on its RWG,
especially in light of RMC composition requirements, than a DCO with a
larger membership. However, the Commission notes that a DCO with a
smaller membership or a homogenous product offering will in most
instances need fewer participants on its RWG to represent a diverse
cross-section of its clearing members and customers of clearing
members. The Commission further notes that it proposed and is adopting
a flexible composition requirement for RWGs in order to allow DCOs to
construct their RWGs in a manner that fits the DCO's membership
composition and product offerings.
In response to a comment by SIFMA AMG, the Commission confirms that
the matters required to be brought to the RWG, ``all matters that could
materially affect the risk profile of the [DCO],'' are the same as
those on which the board of directors must consult with the RMC. The
Commission expects each DCO to define in its policies and procedures
what it means to ``materially affect the risk profile of the DCO.''
In response to Eurex's comment on differences between Sec.
39.24(b)(12) and European law, the Commission notes that the RWG
requirement is not incompatible with EMIR or EU Regulation 152/2013, as
described by Eurex, because nothing in EU Regulation 152/2013 prohibits
a clearinghouse from establishing additional committees beyond the risk
committee, including an RWG. The Commission confirms that Sec.
39.24(b)(12) provides a DCO with the flexibility to design appropriate
rotation policies for its RWG.
The Commission received several comments regarding whether it
should require DCOs to document the proceedings of RWG meetings. In
response to comments from CCP12, FIA, and ISDA arguing that an RWG
documentation requirement would provide transparency and accountability
benefits, the Commission is revising proposed Sec. 39.24(b)(12) to add
that a DCO must ``include requirements for the [DCO] to document and
provide to the risk management committee, at a minimum, a summary of
the topics discussed and the main points raised during each meeting of
the risk advisory working group'' (added text in italics) in the
written policies and procedures required by proposed Sec.
39.24(b)(12). The Commission believes that requiring a DCO to document
and provide an RWG's feedback to the RMC will help ensure that the
RWG's input is appropriately considered in the DCO's risk governance
process. The Commission declines to add a requirement that RMCs
consider feedback from an RWG, but recognizes the potential risk
management benefits
[[Page 44685]]
of RMC and RWG collaboration, and expects that many DCOs will formalize
this collaboration in their governance arrangements. The Commission
believes, however, that this is an area where DCOs would benefit from
the flexibility to structure their governance arrangements in a manner
that best suits them.
III. Amendments to Sec. 39.24(c)
A. Fitness Standards for RMC Members--Sec. 39.24(c)(1)
The Commission proposed to amend Sec. 39.24(c) by adding new
paragraph (c)(1)(iv) (and renumbering current paragraphs (c)(1)(iv) and
(v) accordingly) to require a DCO to establish and enforce appropriate
fitness standards for its RMC members.
BlackRock, Eurex, FIA, ICE, Paolo Saguato, and SIFMA AMG stated
that they generally agree with the Commission's proposal to require a
DCO to establish fitness standards for its RMC members. BlackRock noted
that the material considered by RMC members will be specialized and
will require a certain level of experience and skills. ICE agrees with
allowing DCOs the flexibility to determine appropriate fitness
standards for their RMC members. Eurex noted that the Commission's
proposal would generally harmonize with Article 28(2) of EMIR. NADEX
stated that it doesn't think there should be an RMC requirement, but if
there is, then RMC members should have appropriate fitness standards.
Finally, SIFMA AMG recommended that the Commission also require DCOs to
establish and enforce fitness standards for its RWG members. The
Commission did not receive any comments opposed to the proposed
requirement.
The Commission continues to believe that proposed Sec.
39.24(c)(1)(iv) is consistent with subsection (ii) of DCO Core
Principle O, which requires a DCO to establish and enforce appropriate
fitness standards for directors, members of any disciplinary committee,
members of the DCO, any other individual or entity with direct access
to the settlement or clearing activities of the DCO, and any other
party affiliated with any of the foregoing individuals or entities.\23\
If a DCO is required to establish and consult with its RMC on all
matters that could materially affect the risk profile of the DCO as
proposed, the Commission believes a DCO also would need to consider the
fitness of RMC members, recognizing that fitness standards may vary
across DCOs. Therefore, the Commission is adopting Sec.
39.24(c)(1)(iv) as proposed.
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\23\ See 7 U.S.C. 7a-1(c)(2)(O).
---------------------------------------------------------------------------
The Commission declines to adopt a requirement that a DCO establish
fitness standards for its RWG members. The Commission expects that
RWG(s) will be a critical component of a DCO's overall risk management
framework by providing insight on risk matters from a broad array of
market participants in a more open and less formal forum than an RMC,
so that a larger group of market participants can participate.
Accordingly, the Commission does not believe that it is appropriate to
require DCOs to establish fitness standards for RWG members that could
have the unintended effect of limiting the potential pool of RWG
members.
B. Role of RMC Members--Sec. 39.24(c)(3)
Proposed Sec. 39.24(c)(3) would require a DCO to maintain policies
designed to enable its RMC members to provide independent, expert
opinions in the form of risk-based input on all matters presented to
the RMC for consideration, and perform their duties in a manner that
supports the safety and efficiency of the DCO and the stability of the
broader financial system. The Commission requested comment on whether
requiring RMC members to act as independent experts, neither beholden
to their employers' commercial interests nor acting as fiduciaries of
the DCO, raises any potential legal issues for those members. The
Commission asked whether, as a matter of corporate law, RMC members
would be forced to contend with competing duties or obligations to the
DCO and their employer, including any duties or obligations that would
foreclose RMC participation, and if so, how the goal of receiving
independent, expert opinions could be achieved. The Commission also
asked whether DCOs should be required to have policies specific to RMC
members for managing conflicts of interest.
Barclays, et al., BlackRock, CCP12, CME, ICE, ISDA, OCC, and SIFMA
AMG generally supported proposed Sec. 39.24(c)(3). CCP12 stated that
it strongly believes that RMC members' participation in a DCO's
governance arrangements must be contingent on the members acting in a
manner that prioritizes the safety and efficiency of the DCO and the
stability of the broader financial system. CCP12 also believes that an
RMC member's obligations cannot be to the commercial interests of the
member's employer, as the role of the RMC is to provided risk-based
input on the matters that come before it.
CME, ICE, and OCC commented on the proposal's use of the term
``expert'' in the context of RMC members providing ``expert opinions.''
ICE stated that it would not support imposing an overly strict
interpretation of what constitutes an ``expert'' (e.g., required
accreditation or certification requirements). CME and OCC stated that
the Commission should substitute ``expert'' with ``informed'' as doing
so would enable RMC members to provide independent and informed
opinions in the form of risk-based input, without implicating the legal
connotations that accompany the concept of ``expert opinions.'' CME
went further to state that such a change would also prevent possible
misinterpretation about whether the person providing the opinion must
have a specific degree, certification, accreditation, or license to
demonstrate the requisite expertise. CME noted that using the term
``informed'' instead of ``expert'' would also align the proposed
requirement with a similar provision in the SEC Proposal that requires
``risk-based, independent, and informed'' opinion from RMC members.
Several commenters discussed the proposed requirement for a DCO to
maintain policies designed to enable its RMC members to provide
``independent'' input on risk matters. ISDA stated that it is common
practice that RMC members act not as representatives of their employer,
but as independent experts. ISDA further stated that it is not aware
that this practice has led to issues anywhere. Conversely, Cboe
Digital, ForecastEx, and Nodal questioned the feasibility of ensuring
that RMC members are able to provide independent input. Cboe Digital
commented that while RMC members should be required to set aside
commercial interest bias and provide only risk-based input, they will
nonetheless likely possess a degree of implicit bias that cannot be
untangled given the compensation paid by their employer. Cboe Digital
also argued that the independence requirement is unnecessary because
RMC members are already subject to a DCO's rules designed to minimize
conflicts of interest in the decision-making process of the DCO
established pursuant to Sec. 39.25, must meet a DCO's fitness
standards established pursuant to Sec. 39.24(c), and must carry out
their duties and responsibilities as prescribed by the committee's
governing documents by applying their professional expertise through a
risk-based lens. NADEX stated that while it believes that independent
input is important when considering significant risk matters, policies
requiring RMC
[[Page 44686]]
member independence are unnecessary if a board of directors contains
one or more independent directors, because the board of directors has
the ultimate responsibility to make major decisions. NADEX also argued
that, if the Commission adopts the proposed requirement, DCO-DCM dual
registrants should be exempt because Commission regulations permit DCMs
to establish a board of directors comprised of at least 35 percent
public directors with the same requirement applicable to executive
committees.\24\ Therefore, NADEX argued, dual-registered entities are
already considering independent views in their decision-making. Nodal
argued that it would be exceptionally difficult to obtain truly
independent opinions on risk management matters from clearing members
and customers because they are inherently conflicted. Nodal believes
that the Commission should revise the proposed rules to allow DCOs to
instead design policies focused on including RMC members who would
qualify as ``public directors,'' as defined in the CEA. ForecastEx
commented that the Commission should recognize the tie RMC members will
have with their employers, and design a regulation with this connection
in mind. SIFMA AMG stated that while RMC members' contributions reflect
a risk-based, independent, and informed opinion, the Commission should
explicitly require clearing members and clearing member customers to
represent the perspectives of their employers.
---------------------------------------------------------------------------
\24\ See Guidance on, and Acceptable Practices in, Compliance
with Core Principles, 17 CFR 38, appendix B, Core Principle 16,
section (b)(2). The composition NADEX cites is an ``acceptable
practice'' rather than a strict requirement. See Appendix B section
2.
---------------------------------------------------------------------------
In response to the Commission's request for comment on whether, as
a matter of corporate law, RMC members would be forced to contend with
competing duties or obligations to the DCO and their employer, NADEX
stated that an RMC member's ability to waive their fiduciary duties to
their employing firm would be dependent upon the company's legal entity
type and its state of incorporation/organization, and cited recent
legal authority from the Delaware Court of Chancery which, in the view
of NADEX, decided that a stockholder of a Delaware corporation cannot
waive claims against corporate directors for breach of fiduciary
duties.\25\ NADEX further argued that because the fiduciary laws of the
state in which each DCO is organized may differ, the proposed
independence requirement would not be able to be applied uniformly, and
therefore should not be implemented. Cboe Digital stated that efforts
to attempt to ensure RMC member independence could lead to costly legal
disputes.
---------------------------------------------------------------------------
\25\ See Manti Holdings, LLC v. The Carlyle Group, Inc., 2022 WL
444272 (Del. Ch. Feb. 14, 2022).
---------------------------------------------------------------------------
OCC noted that it has several board-level risk management
committees, and that under general corporate law principles, directors
on those committees necessarily are fiduciaries of the DCO. OCC argued
that this fiduciary relationship does not cause a director to lose
independence; in fact, OCC public directors, who otherwise are
independent from OCC, are fiduciaries to OCC by virtue of their service
as OCC directors. OCC requested that the Commission clarify that a
director's fiduciary duty to the DCO does not render that director non-
independent and does not violate proposed Sec. 39.24(c)(3). Absent
such a clarification, OCC contended, it may be impossible for a
director of a DCO to serve on an RMC at all.
FIA commented that DCOs have governance specific to their corporate
make-up that is governed by applicable corporate laws and that RMC
members, as employees of their firm, may have certain duties to their
employer. However, FIA does not think this raises any competing duties
or obligations with RMC participation. FIA believes that an RMC's
participant clearing members and customers are well-suited for risk
input without requiring fiduciary obligations that may conflict with
their individual employment.
In response to the Commission's request for comment on whether DCOs
should be required to have policies specific to RMC members for
managing conflicts of interest, CCP12 stated that while DCOs already
implement policies that set out the role of the RMC and the duties of
their members, which may also be supplemented by a requirement for
members to sign non-disclosure agreements, a DCO should be afforded the
flexibility to design its own policies for the governance arrangements
of RMCs based on the DCO's own unique structure. FIA suggested that DCO
policies and procedures specific to RMC members for managing conflicts
of interest would help RMC members provide appropriate input. BlackRock
stated that the Commission should require DCOs to specify in their
policies and procedures that RMC members would not be serving as
fiduciaries to the DCO, particularly when acting as a fiduciary to the
DCO may conflict with the RMC's objective of supporting the stability
of the broader financial system. Eurex noted that Article 28(4) of EMIR
provides that the members of the risk committee are bound by
confidentiality requirements, and that where the chairman of the risk
committee determines that a member has an actual or potential conflict
of interest on a particular matter, that member must not be allowed to
vote on that matter. Eurex believes that the Commission could harmonize
Sec. 39.24(c)(3) with EU regulation and fulfill the same interest in
ensuring that RMC members feel empowered to provide objective input by
requiring that all RMC members be bound by confidentiality
requirements, addressing the avoidance of conflicts of interest, and
specifying that RMC members owe no fiduciary duties to DCOs. Eurex
believes this would also reflect the best practices that DCOs already
successfully have in place for RMCs.
After considering the comments, the Commission is adopting proposed
Sec. 39.24(c)(3) as modified below.
Proposed Sec. 39.24(c)(3) would, in part, require a DCO to
maintain policies designed to enable RMC members to provide
``independent, expert opinions in the form of risk-based input.'' As
explained above, CME, ICC, and OCC argued that requiring an RMC member
to provide an ``expert'' opinion could lead to a possible
misinterpretation about whether the person providing the opinion must
have specific credentials to demonstrate sufficient expertise. That was
not the Commission's intention. Rather, the Commission is requiring RMC
members to have pre-existing risk management knowledge. Therefore, the
Commission is adopting Sec. 39.24(c)(3) with the term ``expert''
replaced by ``informed.'' The Commission also notes that this change
will harmonize Sec. 39.24(c)(3) with a similar provision in the SEC
Proposal.\26\
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\26\ See supra n.9, at p. 73 (proposed rule 17Ad-25(d)(2)).
---------------------------------------------------------------------------
In light of the confusion seen in some comments regarding the
Commission's use of the term ``independent'' in proposed Sec.
39.24(c)(3), the Commission is adopting Sec. 39.24(c)(3) without that
term. The Commission's use of the term ``independent'' referred to the
ability of an RMC member to provide risk-based input while serving on
an RMC, rather than input motivated by the commercial interests of the
member's employer. Because a DCO would still be required to maintain
policies designed to enable members of the RMC to provide risk-based
input in the absence of that term, the Commission believes this
modification will avoid potential further confusion while preserving
the substance of the requirement as proposed. The Commission
nevertheless
[[Page 44687]]
notes that its use of the term ``independent'' in the Proposal did not
refer to, as some commenters appeared to suggest, the same concept as
board member independence, which focuses on ensuring that a board
includes members who are not an executive, officer, or employee of the
DCO or an affiliate thereof. The Commission believes that both types of
independence are important to effective risk governance, but they are
distinct concepts. Therefore, the Commission disagrees with NADEX's
suggestion that RMC member independence is unnecessary if a board of
directors contains one or more independent directors. Moreover, the
Commission disagrees with comments questioning the feasibility of an
RMC member providing independent input in light of the compensation
paid to the RMC member by its employer. In the Commission's experience,
it is common practice that RMC members provide effective risk-based
input directed at the safety of the DCO.
In discussing the concept of RMC member independence, the Proposal
noted that RMC members should be neither beholden to their employers'
particular interests nor acting as a fiduciary of the DCO.\27\ ICE and
OCC noted that some RMCs operate as board-level committees, with RMC
members who are also members of the board, and thus have legal
fiduciary duties to the DCO. Moreover, some DCOs include key members of
management on an RMC, such as the DCO's president or chief risk
officer. Board members and DCO management can be valuable contributors
to an RMC, and the Commission wants to be clear that Sec. 39.24(c)(3)
does not prevent individuals with legal fiduciary duties to the DCO
from serving on an RMC. For the purposes of Sec. 39.24, RMC members do
not have fiduciary duties to the DCO by virtue of their participation
on an RMC, and a given member's legal fiduciary duties to the DCO based
on a role as a director or officer of the DCO are not inconsistent with
the role of an RMC member. The DCO itself is legally obligated to
prioritize its own safety, and to support the stability of the broader
financial system and other relevant public interest considerations.\28\
---------------------------------------------------------------------------
\27\ 87 FR 49561-62.
\28\ 17 CFR 39.24(a)(1)(iii), (iv).
---------------------------------------------------------------------------
The Commission received several responses to its request for
comment on whether, as a matter of corporate law, RMC members would be
forced to contend with competing duties or obligations to the DCO and
their employer, and the related matter of whether DCOs should be
required to have policies specific to RMC members for managing
conflicts of interest. NADEX appears to believe that participation on
an RMC could require RMC members to waive their fiduciary obligations
to their employing firms, but the Commission notes that this is not the
case for purposes of Sec. 39.24. The Commission also does not believe
that potential variance in fiduciary laws across states presents an
issue for RMC participation. In response to Cboe Digital's argument
that efforts to attempt to ensure RMC members are independent to an
extent that eliminates all bias, even implicit bias, favoring the
commercial interests of the RMC member's employer could lead to costly
legal disputes, the Commission notes that neither the proposed nor the
final rule requires that degree of independence. Rather, the focus is
on the fact that each RMC member's input, and the input of the RMC as a
whole, should be risk-based, and focused on the safety of the DCO, the
stability of the broader financial system, and other public interest
considerations.
The Commission believes that RMC members are able to manage
conflicts of interest pursuant to the policies and procedures DCOs will
adopt to comply with new Sec. 39.24(c)(3), as well as DCOs' existing
conflict of interest obligations under Sec. 39.25. As suggested by
FIA, these policies may include procedures for RMC members to recuse
themselves in certain circumstances where there is a conflict of
interest or the appearance of a conflict of interest, such as where the
interests of the RMC member's employer are affected in a manner
distinct from the interests of other clearing members or other clients
(e.g., where DCO staff is proposing action against the clearing member
that employs the RMC member). Also, as CCP12 suggested, a DCO may
choose to require RMC members to sign non-disclosure agreements, as
many currently do. Ultimately, the Commission believes, as suggested by
CCP12, that a DCO should be afforded the flexibility to design its
policies in this area based on the DCO's structure and concerns.
IV. Additional Comments
The Commission in the Proposal also requested comment on the
following topics which might be address in a future rulemaking: (1)
whether the Commission should require a DCO to consult with a broad
spectrum of market participants prior to submitting any rule change
pursuant to Sec. Sec. 40.5, 40.6, or 40.10; and (2) whether the
Commission should require a DCO to maintain policies and procedures
designed to enable an RMC member to share certain types of information
it learns in its capacity as an RMC member with fellow employees in
order to obtain additional expert opinion. The Commission appreciates
the comments it received on these topics, and while they are not
discussed here because they were outside the scope of the Proposal, the
Commission may address them in a future rulemaking.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\29\ The final
rule adopted by the Commission will affect only DCOs. The Commission
has previously established certain definitions of ``small entities'' to
be used by the Commission in evaluating the impact of its regulations
on small entities in accordance with the RFA.\30\ The Commission has
previously determined that DCOs are not small entities for the purpose
of the RFA.\31\ Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the regulations
adopted herein will not have a significant economic impact on a
substantial number of small entities. The Chairman made the same
certification in the proposed rulemaking, and the Commission did not
receive any comments on the RFA.
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\29\ 5 U.S.C. 601 et seq.
\30\ 47 FR 18618 (Apr. 30, 1982).
\31\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \32\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Office of Management
and Budget (OMB). This final rule contains reporting and recordkeeping
requirements that are collections of information within the meaning of
the PRA. As the Commission noted in the Proposal, the reporting burden
estimate for ``Requirements for Derivatives Clearing Organizations,''
[[Page 44688]]
OMB control number 3038-0076,\33\ accounted for the disclosure of new
and updated governance arrangements required under Sec. 39.24 to the
Commission, other relevant authorities, clearing members and their
customers, owners of the DCO, and the public.\34\ The Commission
requested comments regarding its PRA burden analysis in the preamble to
the Proposal, but did not receive any responses.
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\32\ 44 U.S.C. 3501 et seq.
\33\ See Derivatives Clearing Organization General Provisions
and Core Principles, 85 FR 4800, 4831 (Jan. 27, 2020).
\34\ See 17 CFR 39.24(b)(2).
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The Commission is making the following modifications to the
Proposal in response to other comments: the Commission is adopting new
Sec. 39.24(d) to provide that a DCO may satisfy the requirements of
paragraphs (b)(11), (b)(12), (c)(1)(iv), and (c)(3) of Sec. 39.24 by
having rules that permit it to clear only fully collateralized
positions; the Commission is revising proposed Sec. 39.24(b)(11) to
require a DCO to create and maintain minutes of each RMC meeting; the
Commission is revising proposed Sec. 39.24(b)(11) to clarify that a
DCO's board must consult with, and consider and respond to input from,
the RMC on the clearing of new products that could materially affect
the risk profile of the DCO; the Commission is modifying proposed Sec.
39.24(b)(11)(ii) to clarify that the rule requires a DCO to maintain
written policies and procedures to make certain that its RMC includes
at least two clearing member representatives and, if applicable, at
least two representatives of customers of clearing members; the
Commission is revising proposed Sec. 39.24(b)(12) to require a DCO to
include in its written policies and procedures related to the formation
and role of each RWG requirements for the DCO to document and provide
to the RMC, at a minimum, a summary of the topics discussed and the
main points raised during each meeting of the RWG; the Commission is
revising Sec. 39.24(b)(12) to require each RWG to meet at least two
times per year, rather than quarterly, as originally proposed; and the
Commission is revising proposed Sec. 39.24(c)(3) to replace the term
``expert'' with ``informed'' and to remove the term ``independent.''
The Commission is revising its burden estimate for OMB control
number 3038-0076 to account for modifications to the Proposal made in
response to comments. Specifically, the Commission believes that the
burden will increase because DCOs will be required under Sec.
39.24(b)(11) to create and maintain minutes of each RMC meeting, and
under Sec. 39.24(b)(12) to document and provide to the RMC, at a
minimum, a summary of the topics discussed and the main points raised
during each meeting of the RWG. The Commission estimates a DCO will
spend an average of four hours creating minutes of each RMC meeting and
four hours documenting a summary of the topics discussed and the main
points raised during each meeting of the RWG, which includes attending
the meeting, taking notes, and putting the notes into the required
format following the meeting. The Commission estimates that a DCO's RMC
and RWG will each need to hold an average of six meetings per year to
satisfy the Sec. 39.24(b)(11) and (12) requirements that a DCO's RMC
and RWG address all matters that could materially affect the risk
profile of the DCO. Therefore, as a result of the modifications, the
revised estimated aggregate burden is as follows:
Estimated number of respondents: 15.\35\
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\35\ The Commission notes that while new Sec. 39.24(d) provides
that a DCO may satisfy the requirements of paragraphs (b)(11),
(b)(12), (c)(1)(iv), and (c)(3) by having rules that permit it to
clear only fully collateralized positions, such DCOs are included in
the total estimated number of respondents because these DCOs would
still be required to develop and disclose governance arrangements
required by the other provisions of Sec. 39.24. The Commission's
estimate is therefore conservative to the extent that these DCOs are
not required to prepare and maintain minutes of each RMC meeting,
and document and provide to the RMC, at a minimum, a summary of the
topics discussed and the main points raised during each meeting of
the RWG.
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Estimated number of reports per respondent: 18.\36\
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\36\ The Commission notes that the previous estimated aggregate
burden was six reports. As described above, the commission is
proposing 12 new reports, bringing the total to 18 reports. See
supra n. 31.
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Average number of hours per report: 4.
Estimated gross annual reporting burden: 1,080.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\37\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five specific considerations identified in Section 15(a) of the CEA
(collectively referred to herein as Section 15(a) factors) addressed
below.
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\37\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission recognizes that the final rule may impose costs. The
Commission has endeavored to assess the expected costs and benefits of
the final rule in quantitative terms, including PRA-related costs,
where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable rules in qualitative
terms. The lack of data and information to estimate those costs is
attributable in part to the nature of the final rule. Additionally, any
initial and recurring compliance costs for any particular DCO will
depend on the size, existing infrastructure, practices, and cost
structure of the DCO.
To further the Commission's consideration of the costs and benefits
imposed by the Proposal, the Commission invited comments from the
public on all aspects of its cost-benefit considerations, including the
identification and assessment of any costs and benefits not discussed
by the Commission; data and any other information to assist or
otherwise inform the Commission's ability to quantify or qualitatively
describe the costs and benefits of the proposed amendments; and
substantiating data, statistics, and any other information to support
positions posited by commenters with respect to the Commission's
discussion. The Commission did not receive any comments specific to the
benefits and costs of the proposed changes to Sec. 39.24. To the
extent that the Commission received comments that indirectly address
the costs and benefits of the Proposal, those comments are discussed as
relevant below.
As outlined above in Section V.B., the Commission made several
modifications in response to comments on the Proposal. The Commission
believes that the amendments to current Sec. 39.24 may result in some
additional costs to DCOs as compared to current Sec. 39.24.
2. Baseline
The baseline for the Commission's consideration of the costs and
benefits of this final rule is: (1) the DCO Core Principles set forth
in Section 5b(c)(2) of the CEA; and (2) Sec. 39.24. DCO Core Principle
O requires a DCO to establish governance arrangements that are
transparent, to fulfill public interest requirements and to permit the
consideration of the views of owners and participants, and Sec. 39.24
implements DCO Core Principle O. Of the fifteen DCOs currently
registered with the Commission, twelve already have some form of an
RMC, which may have been intended, in part, to fulfill the DCO's
compliance obligations under DCO Core Principle O and Sec. 39.24. Of
[[Page 44689]]
the fifteen DCOs currently registered with the Commission, six already
have some form of an RWG, which may have been intended, in part, to
fulfill the DCO's compliance obligations under DCO Core Principle O and
Sec. 39.24. The Commission recognizes that, to the extent that DCOs
already have in place some form of the proposed governance
arrangements, the actual costs and benefits of the proposed regulation
may not be significant.
3. Amendments to Sec. 39.24
a. Summary of the Final Rule
The Commission is adopting regulations that require each DCO to
establish an RMC and require a DCO's board of directors to consult
with, and consider and respond to input from, the RMC on all matters
that could materially affect the DCO's risk profile. The final rule
also requires DCOs to: establish fitness standards for RMC members;
maintain policies to ensure each RMC includes at least two clearing
member representatives and, if applicable, at least two representatives
of customers of clearing members; maintain policies that require
rotation of the membership of each RMC on a regular basis; and maintain
written policies and procedures regarding the RMC consultation process
that include requirements for the DCO to document the board's
consideration of and response to RMC input and create and maintain
minutes of each RMC meeting. In addition, the final rule requires each
DCO to maintain policies enabling RMC members to provide informed
opinions in the form of risk-based input to the RMC, and to perform
their duties in a manner that supports the DCO's safety and efficiency
and the stability of the broader financial system.
The final rule further requires each DCO to establish one or more
RWGs as a forum to seek risk-based input from a broad array of market
participants, such that a diverse cross-section of the DCO's clearing
members and customers of clearing members are represented, regarding
all matters that could materially affect the risk profile of the DCO.
RWGs will be required to convene at least two times per year. In
addition, the final rule requires each DCO to adopt written policies
and procedures related to the formation and role of the RWG and include
requirements for the DCO to document and provide to the RMC, at a
minimum, a summary of the topics discussed and the main points raised
during each meeting of the RWG.
Finally, the Commission is adopting new Sec. 39.24(d) to allow a
DCO to alternatively satisfy the requirements of paragraphs (b)(11),
(b)(12), (c)(1)(iv), and (c)(3) of Sec. 39.24 by having rules that
permit it to clear only fully collateralized positions.
b. Benefits
The Commission believes that Sec. 39.24, as amended by this final
rule, will promote more efficient, effective, and reliable DCO risk
management, benefitting DCOs, clearing members, market participants,
and the financial system more broadly. RMCs will provide a formal
mechanism for DCOs to receive valuable input from market participants
on critical issues including the DCO's margin model, default
procedures, participation requirements, and risk monitoring practices,
as well as the clearing of new products that could materially impact
the DCO's risk profile. Moreover, codifying the requirement that a
DCO's board of directors consult with, and consider and respond to
input from, market participants on an RMC will formalize a widely-used
method for engaging market participants in the risk governance process.
This will allow DCOs to more effectively consider and address risks
impacting DCO stability, market participant stability, and market
resilience.
To the extent that some DCOs already have RMCs that are compliant
or partially compliant with this final rule, the benefits of the
regulations are currently being realized to some degree.
The final rule will help RMCs to be well positioned to provide
effective risk management input to the DCO's board of directors by
requiring DCOs to establish RMC membership fitness standards. These
standards will help to ensure that individual RMC members are
appropriately qualified to perform their duties. Ensuring that RMCs
include at least two clearing member representatives and, if
applicable, at least two representatives of customers of clearing
members will give DCOs the benefit of these stakeholders' perspectives
on risk management issues, and gives market participants the benefit of
a forum for conveying their input on risk management issues. Rotating
the membership of the RMCs on a regular basis will promote a diversity
of perspectives. In addition, requiring DCOs to implement policies
enabling RMC members to provide informed opinions in the form of risk-
based input, and to perform their duties in a manner that supports the
DCO's safety and efficiency, will help ensure that RMC members feel
empowered to provide objective input during this process. These
requirements for RMCs and their members collectively increase the
likelihood of effective DCO risk management. Finally, requiring DCOs to
develop and maintain policies and procedures governing DCO board of
directors consultation with its RMC(s), and to document the activities
of its RMC(s), will promote transparency, accountability, and
predictability, and facilitate effective oversight by the Commission in
this area. After considering a comment from BlackRock arguing that
keeping RMC minutes is necessary to promote transparency,
accountability, and predictability, and comments from FIA, ISDA, and
NADEX that also supported the requirement, the Commission revised
proposed Sec. 39.24(b)(11) to require a DCO to create and maintain
minutes of each RMC meeting.
The requirement that each DCO establish one or more RWGs will
further increase the likelihood of effective DCO risk management by
providing each DCO with an expanded pool of clearing member and
customer of clearing member representatives to consult when considering
matters that could materially affect the risk profile of the DCO.
Requiring DCOs to maintain written policies and procedures related to
the formation and role of each RWG will promote transparency,
accountability, and predictability. After considering comments from
CCP12, FIA, and ISDA arguing that an RWG documentation requirement
would provide transparency and accountability benefits, the Commission
revised proposed Sec. 39.24(b)(12) to require a DCO to include in the
written policies and procedures related to the formation and role of
each RWG a requirement that the DCO document and provide to the RMC, at
a minimum, a summary of the topics discussed and the main points raised
during each meeting of the RWG.
c. Costs
To the extent that some DCOs do not already have RMCs or would need
to adjust the policies and procedures of their existing RMCs to comply
with the amendments to Sec. 39.24, the final rule may impose some
additional costs on DCOs. Costs could arise from additional hours a
DCO's employees (or potentially outside counsel or other consultants)
might need to spend conforming the DCO's rules and procedures to these
requirements, drafting new or amended rules and procedures when
necessary, and implementing these rules and procedures. Specifically, a
DCO must draft written policies and procedures that describe the RMC
consultation process in detail and that enable RMC members to provide
informed opinions in the form of risk-based input on all
[[Page 44690]]
matters presented to the RMC for consideration and perform their duties
in a manner that supports the safety and efficiency of the DCO and the
stability of the broader financial system. In addition, a DCO must
document the board's consideration of and response to RMC input,
prepare minutes of each RMC meeting, and summarize the topics discussed
and main points raised during each RWG meeting. A DCO will also be
required to host RMC and RWG meetings as often as is necessary to
address all matters that could materially affect the risk profile of
the DCO, and with respect to RWGs, at least two times per year.
As noted above, twelve of the fifteen DCOs currently registered
with the Commission already have RMCs in place in some form, which may
lower the cost of implementing the final rule. Further, the DCOs'
policies implementing the final rule will likely not change
significantly from year to year, so after the initial creation of the
policies, the time required to create rules and procedures would be
minimal.
Ongoing compliance with the final rule will also impose costs.
Establishing and maintaining an RMC will cost a DCO time to identify
potential RMC members that meet the fitness standards when the RMC is
initially formed, as well as each time the RMC membership is rotated.
ICE stated that requirements on the rotation of RMC members may impose
a significant burden on market participants to supply appropriately
experienced, knowledgeable, and available employees to participate on
the RMCs. However, the Commission notes that market participants will
not be required to participate on the RMC, and the Commission believes
that the benefits of being able to provide input will outweigh the
costs for those that do participate.
Operation of the RMC would require a DCO to provide information to
the RMC as needed for its consideration, and time for the DCO's board
to consult with the RMC and consider and respond to its input. An RMC's
operation would also require time from its members to consider relevant
information regarding the DCO's risk practices, and to form and deliver
its views. These costs would, however, be dispersed among different
participants over time due to the proposed requirement that DCOs rotate
their RMC members regularly.
d. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits of the amendments to Sec. 39.24 in light of the
following five broad areas of market and public concern identified in
Section 15(a) of the CEA: (1) protection of market participants and the
public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
believes that the final rule will have a beneficial effect on sound
risk management practices and on the protection of market participants
and the public.
(1) Protection of market participants and the public: The
Commission believes that the final rule will enhance the protection of
market participants and the public by improving DCOs' identification
and handling of risk and reducing the likelihood that market
participants and the public face unexpected costs resulting from
deficient DCO risk management. The final rule also gives market
participants a voice in DCO risk management matters through their
participation in RMCs and RWGs, increasing the likelihood that risks to
market participants are adequately considered and minimized.
(2) Efficiency, competitiveness, and financial integrity of futures
markets: The final rule will benefit the financial integrity of the
markets for futures and cleared swaps, and options thereon, by
promoting sound risk management decisions through the adoption of
minimum requirements regarding the substance and form of a DCO's
governance arrangements. The Commission has not identified any other
effect of the final rule on efficiency, competitiveness, and financial
integrity.
(3) Price discovery: The Commission has not identified any effect
of the final rule on price discovery.
(4) Sound risk management practices: The final rule is designed to
support sound risk management practices at DCOs by providing a forum
for informed risk-based input to a DCO's board of directors from
clearing members and customers of clearing members. Requirements
regarding RMC composition, fitness standards for RMC members, and RMC
membership rotation all support RMCs' purpose of promoting sound risk
management practices. In addition, the requirement that a DCO establish
one or more RWGs is designed to further expand and diversify the
information available to a DCO while making material risk decisions,
and to expand opportunities for those with a stake in DCO risk
management to provide input, which further promotes sound risk
management.
(5) Other public interest considerations: The Commission has not
identified any effect of the final rule on other public interest
considerations.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\38\
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\38\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is the promotion of competition. In the Proposal,
the Commission requested comment on whether: (1) the proposed
rulemaking implicates any other specific public interest to be
protected by the antitrust laws; (2) the proposed rulemaking is
anticompetitive and, if it is, what the anticompetitive effects are;
and (3) whether there are less anticompetitive means of achieving the
relevant purposes of the CEA that would otherwise be served by adopting
the proposed rule amendments. The Commission received one comment, from
ISDA, stating that the proposed rules were not anticompetitive.
The Commission has considered the final rule to determine whether
it is anticompetitive and has identified no anticompetitive effects.
Because the Commission has determined that the rules are not
anticompetitive and have no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 39
Governance requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464;
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July
21, 2010, 124 Stat. 1749.
0
2. Amend Sec. 39.24 as follows:
0
a. Revise paragraphs (b)(9) and (10)(iii);
0
b. Add paragraphs (b)(11) and (12);
[[Page 44691]]
0
c. Redesignate paragraphs (c)(1)(iv) and (v) as paragraphs (c)(1)(v)
and (vi) and add new paragraph (c)(1)(iv); and
0
d. Add paragraphs (c)(3) and (d).
The revisions and additions read as follows:
Sec. 39.24 Governance.
* * * * *
(b) * * *
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies;
(10) * * *
(iii) Recovery and wind-down plans required by Sec. 39.39, as
applicable;
(11) Establish one or more risk management committees and require
the board of directors to consult with, and consider and respond to
input from, the risk management committee(s) on all matters that could
materially affect the risk profile of the derivatives clearing
organization, including any material change to the derivatives clearing
organization's margin model, default procedures, participation
requirements, and risk monitoring practices, as well as the clearing of
new products that could materially affect the risk profile of the
derivatives clearing organization. A derivatives clearing organization
shall maintain written policies and procedures to make certain that:
(i) The risk management committee consultation process is described
in detail, and includes requirements for the derivatives clearing
organization to document the board's consideration of and response to
risk management committee input and create and maintain minutes of each
risk management committee meeting;
(ii) A risk management committee includes at least two clearing
member representatives and, if applicable, at least two representatives
of customers of clearing members; and
(iii) Membership of a risk management committee is rotated on a
regular basis; and
(12) Establish one or more market participant risk advisory working
groups as a forum to seek risk-based input from a broad array of market
participants, such that a diverse cross-section of the derivatives
clearing organization's clearing members and customers of clearing
members are represented, regarding all matters that could materially
affect the risk profile of the derivatives clearing organization. A
derivatives clearing organization shall maintain written policies and
procedures related to the formation and role of each risk advisory
working group, and include requirements for the derivatives clearing
organization to document and provide to the risk management committee,
at a minimum, a summary of the topics discussed and the main points
raised during each meeting of the risk advisory working group. Each
market participant risk advisory working group shall convene at least
two times per year.
(c) * * *
(1) * * *
(iv) Members of risk management committee(s);
* * * * *
(3) A derivatives clearing organization shall maintain policies
designed to enable members of risk management committee(s) to provide
informed opinions in the form of risk-based input on all matters
presented to the risk management committee for consideration, and
perform their duties in a manner that supports the safety and
efficiency of the derivatives clearing organization and the stability
of the broader financial system.
(d) Fully collateralized positions. A derivatives clearing
organization may satisfy the requirements of paragraphs (b)(11),
(b)(12), (c)(1)(iv), and (c)(3) of this section by having rules that
permit it to clear only fully collateralized positions.
Issued in Washington, DC, on July 3, 2023, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Governance Requirements for Derivatives Clearing
Organizations--Commission Voting Summary and Chairman's and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
Today the Commission considered a final rule on Governance
Requirements for Derivatives Clearing Organizations (DCOs). As I
highlighted in remarks earlier this year, ``[t]his particular
rulemaking has a long history, and its timing could not be more
crucial.'' \1\ Throughout my CFTC tenure, clearinghouse or central
counterparty (CCP) governance has remained a topic of increasing
emphasis among domestic and international regulators. In the decade
that followed the initial rule proposal addressing DCO
governance,\2\ clearing members continually expressed concerns that
their interests may not be adequately represented, considering that
clearing members, through mutualized default funds, are the bearers
of a majority of a CCP's tail risk.
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\1\ Rostin Behnam, Chairman, CFTC, Keynote Address of Chairman
Rostin Behnam at the ABA Business Law Section Derivatives & Futures
Law Committee Winter Meeting (Feb. 3, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam31.
\2\ Governance requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities; Additional Requirements Regarding the Mitigation of
Conflicts of Interest, 76 FR 722 (proposed Jan 6, 2011), available
at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2010-31898a.pdf.
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Under my sponsorship, the CFTC's Market Risk Advisory Committee
(MRAC) formed a Central Counterparty Risk and Governance
Subcommittee to bring DCOs, clearing members, and customers together
to make recommendations to the full MRAC and ultimately, the
Commission, as to how they, the stakeholders, believed DCO
governance could be improved.\3\ That Subcommittee understood the
assignment. I hope that the completion of this rulemaking serves as
a model of how the Commission and the public (through advisory
committees and other means) can work together towards effective and
attainable solutions.
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\3\ MRAC CCP Risk and Governance Subcommittee, Recommendations
on CCP Governance and Summary of Subcommittee Constituent
Perspectives, (MRAC approved Feb. 23, 2021), available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
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I fully support the final rule which facilitates further
cooperation and collaboration through risk management committees
including representation from clearing members and customers and
through risk advisory working groups, which will give all clearing
members and customers--not just those on the risk management
committee--an opportunity to have their voices heard on risk
management issues which impact them, not just the DCO. While there
may be more to come in this area, today's final DCO Governance rule
promotes the safety and soundness of our DCOs and the financial
system at large. I hope that this final rule encourages the industry
and other stakeholders to continue to work on those issues where, so
far, they have not reached consensus. That said, transparent and
honest communication is a cornerstone to the success of any system.
I am hopeful that this governance rule will establish a new,
enhanced level of communication among participants in the clearing
ecosystem that will serve to bridge differences in multiple areas of
disagreement, ultimately strengthening our financial markets, which
I know is a shared interest.
Appendix 3--Statement of Support of Commissioner Kristin N. Johnson
I support the Commission's approval of the final rule adopting
derivatives clearing organization (DCO) governance measures that
establish structural and procedural mechanisms designed to improve
efforts to identify and mitigate material risks, strengthen DCO
resilience, and foster the integrity of our markets.
[[Page 44692]]
DCOs provide comprehensive settlement services and take on
counterparty risk with the assistance of clearing members to
facilitate centralized and over-the-counter trading. DCOs also stand
as final guarantors of performance in the event of a customer and
clearing member default. The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) \1\ introduced
groundbreaking reforms that shifted significant volumes of
derivatives trading to clear through DCOs, giving them a key role in
maintaining the stability and integrity of the derivatives markets
through comprehensive and prudent risk mitigation practices. These
practices include securely handling participant funds and assets,
developing and administering robust forward-looking margining
frameworks for idiosyncratic markets, consistently setting
appropriate margin levels for trader portfolios, and collecting
risk-based guaranty fund contributions from clearing members. DCO
risk mitigation practices can profoundly impact individual firms
and, depending on the systemic importance of a given DCO, the
broader financial market.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, title VII (July 21, 2010) (codified in relevant
part at 7 U.S.C. 7a-1).
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The rules adopted today arise out of recommendations that the
Commission received from the Central Counterparty (CCP) Risk and
Governance Subcommittee (Subcommittee) of the Market Risk Advisory
Committee (MRAC), which I sponsor.\2\ The final rule requires DCOs
to standup risk management committees (RMCs) comprised of clearing
members and their customers to leverage their risk management
expertise and formalize the role of market participants in the DCO
governance process pursuant to DCO Core Principles.\3\ The final
rule also requires DCOs to establish separate Risk Advisory Working
Groups (RWGs) that would be larger than the RMCs and intended to
seek risk-based input from a broad array of market participants. The
different membership and purpose of the RMC and the RWG will enhance
a DCO's risk management, and the flexibility allowed by the final
rule as to implementation will allow DCOs to structure these groups
in the ways best suited to their structure, size, and product
offerings.
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\2\ See Report of the Central Counterparty Risk and Governance
Subcommittee (Report), Market Risk Advisory Committee of the
Commodity Futures Trading Commission (Feb. 23, 2021).
\3\ DCO Core Principles O (Governance Fitness Standards), P
(Conflicts of Interest), and Q (Composition of Governing Boards)
collectively address governance requirements related to considering
the views of owners and participants, adopting appropriate fitness
standards for directors and others, minimizing and resolving
conflicts of interest in decision-making, and including market
participants on governing boards or committees. See 7 U.S.C. 7a-
1(c)(2)(O), (P), and (Q). DCO Core Principle O expressly directs
each DCO to establish governance arrangements that ``permit the
consideration of the view of owners and participants.''
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This rule was initially proposed on August 11, 2022, with a
comment period that closed on October 11, 2022.\4\ Eighteen comments
were submitted, addressing a range of questions posed in the
proposed rulemaking and other points. I specifically want to address
one of the issues raised by the commenters.
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\4\ See Governance Requirements for Derivatives Clearing
Organizations, 87 FR 49559 (Aug. 11, 2022); see also Statement of
Commissioner Kristin N. Johnson in Support of Proposed Rulemaking to
Strengthen DCO Governance, July 27, 2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072722b.
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Commenters expressed concerns regarding the potential for
conflicts of interest by RMC members arising out of potential
tension between their duties to their employers versus their role as
an RMC member.\5\ There is of course a certain inherent divergence
of views that is associated with requiring RMCs to have a diverse
membership, but I find that any accompanying conflict arising out of
that divergence can be managed by the DCO through application of
appropriate policies and procedures, recognizing that RMC members
are intended to give their best, informed opinion of risk-related
issues considering the particular context in which they sit. I also
agree with the view expressed by the Futures Industry Association
that RMC policies and procedures may include procedures for an RMC
member to recuse herself or himself in circumstances where there is
an actual or apparent conflict of interest.
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\5\ See Sec. 39.24(c)(3).
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The Dodd-Frank Act prominently entrusts DCOs with maintaining
the integrity of the derivatives markets through risk mitigation
practices that can profoundly impact individual firms and the
broader financial market. The Dodd-Frank Act amendments to the
Commodity Exchange Act also expressly direct each DCO to establish
governance arrangements that internalize the views of participants.
I believe that the rules we adopt today effectively accomplish the
articulated goals of making our markets safer and more resilient,
and will enhance a DCO's ability to prudently manage risk. I thank
staff in the Division of Clearing and Risk for their efforts, and
also thank all of the entities and organizations that submitted
comments to assist the Commission in achieving the best outcome with
this rulemaking.
Appendix 4--Statement of Commissioner Christy Goldsmith Romero
Transparency, accountability, predictability, and effective
Commission oversight--these are the public interests that I wrote
last summer in the description of our proposed governance rule.
These public interests are foundational to clearinghouse resilience.
They remind us that the impact of market disruptions and stress is
felt the hardest by farmers, ranchers, and producers, who face
rising inputs, and hardworking American families who may have to pay
more to feed their family, drive their car, or cool and heat their
homes.
Commodity and derivatives markets have faced unexpected global
challenges and disruptions over the last few years. Some were
unexpected, hopefully once-in-a-lifetime events, like the pandemic
and Russia's war against Ukraine. Others, like climate disasters and
cybercrime, have been building for years, and we should expect that
markets will continue to grapple with them indefinitely.
As I said at a Global Markets Advisory Committee meeting, ``We
have arrived at a time when we should expect the unexpected. By
expecting the unexpected, exchanges, clearinghouses, intermediaries,
the Commission, and others can prepare a game plan for future market
challenges--a game plan that holds the lessons of past disruptions,
but also has the flexibility to adapt to new challenges. There is
great benefit to clear heads planning now. . . . [C]omplex issues
impacting global derivatives markets would benefit from forward
thinking. Working through them now with clear heads and the benefit
of time can lead to a workable game plan that will keep markets
functioning well during times of stress.'' \1\
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\1\ CFTC Commissioner Christy Goldsmith Romero, Expect the
Unexpected in Global Markets, (Feb. 13, 2023) https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement021323.
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The best game plan comes from engagement and collaboration
between all stakeholders, specifically here, clearinghouses, their
members, and market participants. Under the rule, the Commission
would require a clearinghouse to consult with, consider, and respond
on the merits to substantive input from, a risk management committee
made up of clearing members. This consultation would be required for
all matters that could materially affect the risk profile of the
clearinghouse. Clearinghouses will also be required to establish a
risk advisory working group to consider input from an even broader
array of market participants.
Together, clearinghouses, their members, and market
participants, can benefit from a 360 degree view of risk, and make a
powerful force in developing a workable game plan to keep markets
functioning well during times of stress. The rule balances ensuring
members' voices are adequately heard in a meaningful way, with the
critical public service perspective of clearinghouses. The rule
recognizes strength in numbers and diversity of opinion.
There are several enhancements that I advanced in the proposed
rule after speaking to many stakeholders.\2\ These enhancements are
in addition to recommendations made by the Market Risk Advisory
Committee (``MRAC'') in early 2021, after the pandemic, but prior to
unprecedented levels of volatility and high prices triggered by
Russia's war against Ukraine. I am grateful for MRAC members who
contributed, stakeholders who shared their views with me, and for
the staff who worked with me. I was pleased to see that the
enhancements I advanced were substantially supported by public
comment and are included in the final rule.
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\2\ CFTC Commissioner Christy Goldsmith Romero, Statement of
Commissioner Christy Goldsmith Romero Regarding the Proposal to
Strengthen the Resilience of Clearinghouses to Future Risk, (July
27, 2022) https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072722.
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In particular, I advanced requirements for a clearinghouse to
maintain written policies
[[Page 44693]]
and procedures: (1) describing in detail the consultation process
between a clearinghouse and its risk management committee, including
for deciding which matters could materially affect the
clearinghouse's risk profile; and (2) governing the role of members
of the risk management committee and risk working group including
addressing any conflicts of interest. I also advanced the
requirements for a clearinghouse to document: (1) the meetings of
the risk management committee and risk working group; and (2) the
clearinghouse's consideration of, and response to, the input of the
risk management committee. I also advanced requirements for regular
periodic meetings of the risk working group. I thank all who
provided comments supporting these enhancements. I am thrilled to
see them adopted in the final rule.
My intent in including requirements for written policies and
procedures, accompanied by documentation, was to ensure that our
rule met the public's interest. Drawing on my experience as a former
Inspector General, I have witnessed time and time again that
requirements for policies and procedures as well as documentation
promote transparency, accountability, and predictability, and
facilitate effective Commission oversight.
Policies and procedures help ensure that a game plan on how
matters that could materially impact a clearinghouse's risk profile
will be assessed, and who will have a say, are made now, not during
times of market disruption. Requirements for policies, procedures,
and documentation also promote consistency over the full range of
clearinghouses, and may lead to best practices. This includes
systemically significant clearinghouses and other well established
clearinghouses who may already meet some or all of these
requirements. It also includes new or future entrants, including in
the digital asset space, who may not have a history of risk
management committees, the consideration of input from clearing
members, or policies, procedures or documentation requirements. I
remain hopeful that these requirements will serve as a launch pad
towards best practices that promote the public's interest in
transparency, accountability, predictability, and effective
oversight.
For these reasons, I support the final rule.
Appendix 5--Statement of Support of Commissioner Caroline D. Pham
As I've said before, one of the many proud traditions at the
Commodity Futures Trading Commission (Commission or CFTC) is that
Commissioners get to sponsor advisory committees comprised of
members of the public to provide expert advice and input.\1\ The
Final Rule on Governance Requirements for Derivatives Clearing
Organizations (DCOs) had its roots in recommendations made by the
Central Counterparty (CCP) Risk and Governance Subcommittee
(Subcommittee) of the Market Risk Advisory Committee (MRAC) when
then-Commissioner Behnam chaired the MRAC in 2021.\2\ I commend
Chairman Behnam for his leadership of the MRAC at that time, and
providing an example of how the industry can come together to
propose workable solutions to issues in our markets through the
CFTC's advisory committees.
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\1\ See Opening Statement of Commissioner Caroline D. Pham
before the Global Markets Advisory Committee Inaugural Meeting on
February 13, 2023, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement021323.
\2\ See MRAC CCP Risk and Governance Subcommittee,
Recommendations on CCP Governance and Summary of Subcommittee
Constituent Perspectives, available at https://www.cftc.gov/media/6201/MRAC_CCPRGS_RCCOG022321/download (Feb. 23, 2021).
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I support today's Final Rule on Governance Requirements for
DCOs. I would like to sincerely thank the staff of the Division of
Clearing and Risk (DCR) for their work over many years to address
market participants' efforts to enhance CCP risk and governance and
codify standards, in particular Clark Hutchison, Eileen Donovan, Tad
Polley, and Joe Opron. I especially want to express my appreciation
to DCR staff for working with me to address my concerns to provide
regulatory clarity and not upend existing law or standards for
corporations and corporate governance.
In response to the volatility and dislocations in our markets in
recent years, CFTC staff have spent countless hours monitoring our
registrants, making themselves available for updates, questions, and
requests for guidance and relief under stressful circumstances.
At the same time, market participants have come together to
identify issues that regulators and CCPs should consider to enhance
financial stability. Notably, one group recommended enhancing
governance practices to obtain and address input from a broader
array of market participants on relevant risk issues to improve CCP
resilience.\3\
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\3\ See A Path Forward for CCP Resilience, Recovery, and
Resolution (Mar. 10, 2020), https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/news/a-path-forward-for-ccp-resilience-recovery-and-resolution/pdf-0.pdf.
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Our markets--relied on for risk management and price discovery--
have felt, yet ultimately withstood, the effects of the COVID-19
pandemic and the widespread disruptions it caused. While markets
continue to experience volatility, stresses, and dislocations,\4\ I
am pleased that stakeholders are undertaking studies and analyses of
the recent years and using data and observations from market
participants to produce lessons learned that will serve as important
guides for policymakers.
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\4\ For instance, Treasury Secretary Yellen recently warned of
market stress associated with the U.S. debt limit negotiations. See
Christopher Condon, Yellen Says Treasury Pushing for Debt-Limit
Deal, Not Prepping for Default, Bloomberg, (May 24, 2023), available
at https://www.bloomberg.com/news/articles/2023-05-24/yellen-says-treasury-pushing-for-deal-not-prepping-for-default#xj4y7vzkg. The
European Central Bank has described the eurozone's financial
stability status as ``fragile.'' See Hannah Brenton, ECB warns of
`fragile' financial stability after US banking crisis, PoliticoPro
(May 31, 2023).
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During all this, our DCOs have been a pillar of strength for the
derivatives markets. As U.S. Representative Glenn ``GT'' Thompson,
Chairman of the House Committee on Agriculture put it:
[T]he strength of our derivatives markets should not be taken for
granted. Building deep, liquid, and safe derivatives markets is the
result of informed trade-offs and negotiated compromises between the
needs of different market participants. It takes constant work to
uncover, understand, and manage the risks that can develop.
Widespread clearing is one reason for the success of our derivatives
markets, despite the recent turmoil. Clearing provides access to
essential risk management tools for hedgers and creates a safer
financial system for all Americans. Our cleared markets perform so
well due to the public servants and professionals who work every day
to understand and manage market risks, both at the [CFTC] and across
the derivatives industry[.] \5\
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\5\ Rep. Glenn ``GT'' Thompson (PA-15), Opening Statement for
the Hearing ``Rising Risks: Managing Volatility in Global Commodity
Derivatives Markets,'' (Mar. 9, 2023), available at https://agriculture.house.gov/news/documentsingle.aspx?DocumentID=7564.
Among the ways in which DCOs performed well during a period of
intense volatility, an interim CFTC staff report highlighted that
both the size and frequency of portfolio-level breaches were well
within risk management tolerances at our DCOs, and major DCOs had
sufficient pre-funded collateral in the form of initial margin to
cover any potential clearing member defaults within and across and
CCPs. See CFTC Interim Staff Report, Cleared Derivatives Markets:
March-April 2020, (2021),
InterimStaffClearedDerivativesMarket0420_0621.pdf.
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I'd like to echo Chairman Thompson's words and thank all the
staff of the CFTC who ensure that our markets are safe and well-
functioning, no matter what challenges we face.
Upholding a Principles-Based Framework for DCOs
Today, we are taking a forward-looking approach and adopting
rules to strengthen our DCOs. I believe that one reason why our
markets are resilient even during times of market stress is because
our principles-based regulatory framework ensures that strong
guardrails are in place, while giving our registered entities like
DCOs flexibility to implement our Core Principles in a way that best
fits their business and operating model. To put it another way--we
are going to make sure that you build your house to code, but I'm
not going to tell you what color to paint it.
It is my hope that the Final Rule on Governance Requirements for
DCOs is consistent with that approach by not being overly
prescriptive. The rule requires DCOs to establish and consult with
one or more risk management committees (RMCs) that includes
representatives of clearing members and customers of clearing
members on matters that could materially affect the risk profile of
the DCO. In addition, the rule requires DCOs to establish minimum
requirements for RMC composition and rotation, and to establish and
enforce fitness standards for RMC members. The rule also requires
DCOs to maintain written policies
[[Page 44694]]
and procedures governing the RMC consultation process and the role
of RMC members. In addition to the RMC, the rule requires DCOs to
establish one or more market participant risk advisory working
groups (RWGs) that must convene at least twice a year, and adopt
written policies and procedures related to the formation and role of
the RWG.
I appreciate that the staff took many commenters' suggestions to
make the rule more flexible for DCOs while still adhering to the
Part 39 Core Principles. For example, the final rule does not
categorically treat a DCO's proposal to clear a new product as a
matter that could materially affect the DCO's risk profile, but
instead provides flexibility to determine materiality on a case-by-
case basis and to then require RMC consultation pursuant to Sec.
39.24(b)(11). Staff recognized that this could result in unnecessary
administrative costs and delays in launching new products, and,
importantly, that DCOs are uniquely situated to determine what
constitutes a new product.
Providing Regulatory Clarity To Promote Compliance
I appreciate that the staff made revisions to certain rule
provisions in response to my concerns regarding regulatory clarity.
If a rule is confusing, it can actually inhibit compliance simply
because it is unclear what the Commission's expectations are for our
registered entities or registrants. Mind-reading is not a good
approach for rule implementation.
For example, the preamble to the final rule now provides further
clarification that DCOs have flexibility on how they structure the
RMC, and the difference between a DCO structuring an RMC as an
advisory committee to satisfy Sec. 39.24(b)(11), and the risk
management committee of a board of directors, especially for public
companies and their subsidiaries and affiliates.
Proposed Sec. 39.24(b)(11) required a DCO to maintain
governance arrangements that establish one or more RMCs, and a DCO's
board of directors to consult with, and consider and respond to
input from, its RMC(s) on all matters that could materially affect
the risk profile of the DCO, including any material change to the
DCO's margin model, default procedures, participation requirements,
and risk monitoring practices, as well as the clearing of new
products.
My concern--reflected in various comment letters--was that the
proposal was unclear whether an RMC was required to be structured as
a board-level committee, or if the RMC could be structured as an
advisory committee, and the DCO could still have a separate risk
management committee of the board of directors for corporate
governance purposes. I appreciate that the preamble to the final
rule now clarifies that if a DCO structures its RMC as an advisory
committee to satisfy the requirements of Sec. 39.24(b)(11), it may
also have a separate board-level risk management committee that is
comprised of members of the board of directors that is not subject
to Sec. 39.24(b)(11).
If the DCO's RMC for purposes of Sec. 39.24(b)(11) was a board-
level committee, our RMC requirements would potentially conflict
with existing standards for corporate governance. I was concerned
the proposal inaccurately suggested a requirement that the RMC must
be structured as a board-level committee, and consequently, that
DCOs had to appoint clearing members and customers to their boards
of directors to meet the requirements of Sec. 39.24(b)(11), among
other changes to board procedures and processes. How a firm
establishes board committees and delegates responsibilities is an
important corporate governance decision and process, and subject to
existing corporations law and other regulations.\6\ Comment letters
reflected these concerns and confusion, especially since the SEC has
proposed similar (but not identical) risk management committee
requirements for clearing agencies, and does require that clearing
agencies establish a board-level risk management committee.
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\6\ See, e.g., Matteo Tonello, ``Should Your Board Have a
Separate Risk Committee?'' Harvard Law School Forum on Corporate
Governance (Feb. 12, 2012) (based on a Conference Board Director
Note by Carol Beaumier and Jim DeLoach, which was adapted from Board
Perspectives: Risk Oversight, Protiviti, Issue 24, October 2011),
available at https://corpgov.law.harvard.edu/2012/02/12/should-your-board-have-a-separate-risk-committee/.
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In addition, at my request, the staff has removed the word
``independent'' from the final rule text with respect to members of
an RMC for purposes of Sec. 39.24(b)(11), because this issue was
already addressed by the rule's requirements for conflicts of
interest policies and risk-based input, and it is different from the
concept of ``independence'' for outside board directors. This issue
becomes particularly acute if the RMC is structured as a board-level
committee, or if a board director is serving on an RMC that is
structured as an advisory committee. I do not believe that the
Commission should interpret or opine on corporate governance law or
Delaware corporations law requirements regarding the duties of the
board of directors, including fiduciary duties. I believe that the
proposal's concept of ``independence'' was more akin to input by RMC
members that is informed by expertise with avoidance of conflicts of
interest, and the final rule appropriately reflects this.
Conclusion
In closing, I'd like to thank my fellow Commissioners and the
staff for addressing my concerns, and especially thank the staff for
their hard work on this rule designed to provide a forum for
stakeholders to be engaged in the sound risk management of our
clearing system for derivatives markets. The diverse viewpoints
provided by stakeholders, including clearing members and their
customers, should help to increase the dialogue between DCOs and
clearing members and result in enhanced resilience for CCPs.
[FR Doc. 2023-14361 Filed 7-12-23; 8:45 am]
BILLING CODE 6351-01-P