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2010-31898

  • FR Doc 2010-31898[Federal Register: January 6, 2011 (Volume 76, Number 4)]

    [Proposed Rules]

    [Page 722-737]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr06ja11-9]

    [[Page 722]]

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    COMMODITY FUTURES TRADING COMMISSION

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

    RIN 3038-AD01

    Governance Requirements for Derivatives Clearing Organizations,

    Designated Contract Markets, and Swap Execution Facilities; Additional

    Requirements Regarding the Mitigation of Conflicts of Interest

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')

    hereby proposes regulations to further implement new statutory

    provisions enacted by Title VII of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act (``Dodd-Frank Act''). Specifically, the

    Commission proposes certain substantive requirements on the resolution

    of conflicts of interest, in order to further implement core principles

    applicable to derivatives clearing organizations (``DCOs''), designated

    contract markets (``DCMs''), and swap execution facilities (``SEFs'').

    Such substantive requirements address reporting, transparency in

    decision-making, and limitations on use or disclosure of non-public

    information, among other things. For DCOs and DCMs, the Commission also

    proposes regulations to implement core principles concerning governance

    fitness standards and the composition of governing bodies. Finally, for

    publicly-traded DCMs, the Commission proposes regulations to implement

    the core principle on diversity of Boards of Directors.

    The Commission welcomes comments on all aspects of the proposed

    regulations.

    DATES: Submit comments on or before March 7, 2011.

    ADDRESSES: You may submit comments, identified by RIN 3038-AD01 number,

    by any of the following methods:

    Agency Web site, via its Comments Online process: http://

    comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's Regulations.\1\

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    \1\ 17 CFR 145.9.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Nancy Liao Schnabel, Special Counsel,

    Division of Clearing and Intermediary Oversight (DCIO), at 202-418-5344

    or nschnabel@cftc.gov; Lois Gregory, Assistant Deputy Director for

    Market Review, the Division of Market Oversight (DMO), at 202-418-5569

    or lgregory@cftc.gov; Alicia Lewis, Attorney-Advisor, DCIO, at 202-418-

    5862 or alewis@cftc.gov; Jordan O'Regan, Attorney-Advisor, DCIO, at

    202-418-5984 or joregan@cftc.gov; or Jolanta Sterbenz, Counsel, Office

    of the General Counsel, at 202-418-6639 or jsterbenz@cftc.gov; in each

    case, also at the Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\

    Title VII of the Dodd-Frank Act \3\ amended the Commodity Exchange Act

    (``CEA'') \4\ to establish a comprehensive new regulatory framework for

    swaps and certain security-based swaps. The legislation was enacted to

    reduce risk, increase transparency, and promote market integrity within

    the financial system by, among other things: (i) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; \5\ (ii) imposing mandatory clearing and trade

    execution requirements on clearable swap contracts; (iii) creating

    robust recordkeeping and real-time reporting regimes; and (iv)

    enhancing the rulemaking and enforcement authorities of the Commission

    with respect to, among others, all registered entities and

    intermediaries subject to the oversight of the Commission.

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    \2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010). The text of the Dodd-Frank Act may be accessed at http://

    www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.

    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \4\ 7 U.S.C. 1 et seq.

    \5\ In this release, the terms ``swap dealer'' and ``major swap

    participant'' shall have the meanings set forth in Section 721(a) of

    the Dodd-Frank Act, which added Sections 1a(49) and (33) of the CEA.

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

    to promulgate rules to further define, among other terms, ``swap

    dealer'' and ``major swap participant.'' The Commission is in the

    process of this rulemaking. See, e.g., http://www.cftc.gov/

    LawRegulation/DoddFrankAct/OTC_2_Definitions.html. The Commission

    anticipates that such rulemaking will be completed by the statutory

    deadline of July 15, 2011.

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    In order to ensure the proper implementation of the comprehensive

    new regulatory framework, the Dodd-Frank Act requires the Commission to

    promulgate regulations regarding the mitigation of conflicts of

    interest in the operation of certain DCOs, DCMs, and SEFs. On October

    1, 2010, the Commission identified possible conflicts. Section II below

    briefly summarizes these conflicts. To address these conflicts, the

    Commission proposed \6\ both (i) structural governance requirements \7\

    and (ii) limits on ownership of voting equity and exercise of voting

    power \8\ (the ``Conflicts of Interest NPRM'').

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

    \7\ According to the Conflicts of Interest NPRM: (i) Each DCO,

    DCM, or SEF must have a Board of Directors with at least 35 percent,

    but no less than two, public directors; (ii) each DCO, DCM, or SEF

    must have a nominating committee with at least 51 percent public

    directors; (iii) each DCO, DCM, or SEF must have one or more

    disciplinary panels, with a public participant as chair; (iv) each

    DCM or SEF must have (A) a regulatory oversight committee (``ROC''),

    with all public directors, and (B) a membership or participation

    committee, with 35 percent public directors; and each DCO must have

    a risk management committee (``RMC''), with at least (A) 35 percent

    public directors and (B) 10 percent customer representatives. See

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

    \8\ According to the Conflicts of Interest NPRM, no DCM or SEF

    member (and related persons) may (i) beneficially own more than 20

    percent of any class of voting equity or (ii) directly or indirectly

    vote an interest exceeding 20 percent of the voting power of any

    class of equity.

    A DCO may choose one of the following alternatives. Under the

    first alternative, no individual member may beneficially own more

    than 20 percent of any class of voting equity or directly or

    indirectly vote an interest exceeding 20 percent of the voting power

    of any class of equity. In addition, the enumerated entities,

    whether or not they are DCO members, may not collectively own on a

    beneficial basis more than 40 percent of any class of voting equity,

    or directly or indirectly vote an interest exceeding 40 percent of

    the voting power of any class of equity.

    Under the second alternative, no DCO member or enumerated

    entity, regardless of whether it is a DCO member, may own more than

    five (5) percent of any class of voting equity or directly or

    indirectly vote an interest exceeding five (5) percent of the voting

    power of any class of equity. Notwithstanding the foregoing, the

    Conflicts of Interest NPRM provides a procedure for the DCO to apply

    for, and the Commission to grant, a waiver of the abovementioned

    limits. See generally 75 FR 63732 (Oct. 18, 2010).

    ``Enumerated entities'' are those entities listed in Section

    726(a) of the Dodd-Frank Act and include: (i) Bank holding companies

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

    nonbank financial company supervised by the Board of Governors of

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

    a swap dealer; (v) a major swap participant; or (vi) an associated

    person of (iv) or (v).

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    The Conflicts of Interest NPRM primarily aims to implement Sections

    726 and 725(d) of the Dodd-Frank Act.\9\ However, the Commission drew

    additional authority to propose the abovementioned requirements from

    Sections 725(c),\10\ 735(b),\11\ and 733 \12\ of the Dodd-Frank Act.

    Together, such sections contain DCO, DCM, or SEF core principles that

    require each such entity to (i) establish and enforce rules to minimize

    conflicts of interest in its decision-making process and (ii) establish

    a process for resolving such conflicts.\13\ This proposed rulemaking

    (the ``Governance NPRM'') aims to more fully implement such core

    principles. Therefore, the Governance NPRM proposes the following

    requirements, which complement those in the Conflicts of Interest NPRM:

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

    empowers the Commission to adopt ``numerical limits * * * on

    control'' or ``voting rights'' that enumerated entities may hold

    with respect to such DCOs, DCMs, and SEFs. Second, Section 726(b) of

    the Dodd-Frank Act directs the Commission to determine the manner in

    which its rules may be deemed necessary or appropriate to improve

    the governance of certain DCOs, DCMs, or SEFs or to mitigate

    systemic risk, promote competition, or mitigate conflicts of

    interest in connection with the interaction between swap dealers and

    major swap participants, on the one hand, and such DCOs, DCMs, and

    SEFs. Finally, Section 726(c) of the Dodd-Frank Act directs the

    Commission to consider the manner in which its rules address

    conflicts of interest in the abovementioned interaction arising from

    equity ownership, voting structure, or other governance arrangements

    of the relevant DCOs, DCMs, and SEFs.

    Section 725(d) of the Dodd-Frank Act states: ``[t]he Commodity

    Futures Trading Commission shall adopt rules mitigating conflicts of

    interest in connection with the conduct of business by a swap dealer

    or a major swap participant with a derivatives clearing

    organization, board of trade, or a swap execution facility that

    clears or trades swaps in which the swap dealer or major swap

    participant has a material debt or material equity investment.''

    \10\ Section 725(c) of the Dodd-Frank Act amends Section 5b(c)

    of the CEA to include new DCO Core Principle O (Governance Fitness

    Standards), P (Conflicts of Interest), and Q (Composition of

    Governing Boards). Together, such core principles empower the

    Commission to develop performance standards for determining whether

    a DCO has: (i) Governance arrangements that are transparent to

    fulfill public interest requirements and to permit consideration of

    the views of owners and participants; (ii) appropriate fitness

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

    minimize and resolve conflicts of interest in DCO decision-making;

    and (iv) governing boards or committees that include market

    participants.

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

    DCM core principle on conflicts of interest and governance fitness

    standards, but (i) amends the existing DCM core principle on

    composition of governing boards of contract markets to state:

    ``[t]he governance arrangements of the board of trade shall be

    designed to permit consideration of the views of market

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

    of the Board of Directors. Together, such core principles empower

    the Commission to develop performance standards for determining

    whether a DCM has: (i) Appropriate fitness standards for directors,

    members, and others; (ii) rules to minimize conflicts of interest in

    DCM decision-making; (iii) appropriate governance arrangements to

    permit the Board of Directors to consider the views of market

    participants; and (iv) rules, if the DCM is a publicly-traded

    company, regarding the cultural diversity of the Board of Directors.

    \12\ Section 733 of the Dodd-Frank Act includes SEF Core

    Principle 12 (Conflicts of Interest) in new Section 5h of the CEA.

    Such core principle empowers the Commission to establish performance

    standards for determining whether a SEF has rules to minimize and

    resolve conflicts of interest in SEF decision-making.

    \13\ The conflicts of interest core principles are DCO Core

    Principle P, DCM Core Principle 16, and SEF Core Principle 12. Such

    core principles shall hereinafter be referred to as ``Conflicts of

    Interest Core Principles.''

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    Each DCO must report to the Commission when its Board of

    Directors rejects a recommendation from or supersedes an action of the

    RMC; \14\

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    \14\ In addition, a DCO would be required to report to the

    Commission when its RMC rejects a recommendation from or supersedes

    an action of a subcommittee of the RMC.

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    Each DCM or SEF must report to the Commission when its

    Board of Directors rejects a recommendation from or supersedes an

    action of the ROC or the Membership or Participation Committee; \15\

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    \15\ The proposed regulations would also require the ROC of a

    DCM or SEF to prepare an annual report to the Board of Directors

    assessing various components of the regulatory program of such DCM

    or SEF.

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    Each DCO, DCM, or SEF must:

    [cir] Implement a regulatory program to identify, on an ongoing

    basis, existing and potential conflicts of interest, as well as a

    method for making fair and non-biased decisions in the event of such a

    conflict;

    [cir] Prescribe limits on the use or disclosure of non-public

    information by owners, members of the Board of Directors, members of

    any committee, officers or other employees; and

    [cir] Make certain information on governance arrangements available

    to the public and relevant authorities, including summaries of

    significant decisions.

    In addition to containing the Conflicts of Interest Core

    Principles, Sections 725(c), 735(b), and 733 of the Dodd-Frank Act add

    or amend DCO or DCM core principles on (i) governance fitness standards

    and (ii) composition of the Board of Directors or other governing

    bodies. Section 735(b) of the Dodd-Frank Act also adds a DCM core

    principle on diversity of certain Boards of Directors. To implement

    such core principles, the Governance NPRM proposes the following

    requirements:

    Each DCO or DCM must specify and enforce fitness standards

    for its members, directors, members of any Disciplinary Panel or

    Disciplinary Committee, persons with direct access, and certain

    affiliates;

    Each publicly-traded DCM must evaluate the breadth and

    cultural diversity of its Board of Directors;

    Each DCM must design and institute a process for

    considering the range of opinions that market participants \16\ hold

    with respect to (i) the functioning of an existing market and (ii) new

    rules or rule amendments; and

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    \16\ In general, the Commission interprets the term ``market

    participants'' to be more expansive than the term ``member'' (as

    defined in Section 1a(34) of the CEA). Therefore, with respect to

    DCMs, DCOs, and SEFs, the Commission construes the term ``market

    participants'' to encompass customers of members (to the extent that

    such customers do not fall within Section 1a(34) of the CEA).

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    Each DCO must have 10 percent customer representation on

    its Board of Directors, in lieu of having such representation on the

    RMC (or the RMC Subcommittee). Alternatively, each DCO must have 10

    percent customer representation on the RMC (or the RMC Subcommittee),

    in lieu of having such representation on the DCO Board of

    Directors.\17\

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

    Commission is reconsidering that portion of the Conflicts of

    Interest NPRM that requires 10 percent customer representation on

    the RMC. The Commission notes that it has authority under both

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

    Principles P (Conflicts of Interest) and Q (Composition of Governing

    Boards) to adopt either a Board or RMC composition requirement.

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    [[Page 724]]

    Sections 725(c), 735(b), and 733 explicitly authorize the

    Commission to promulgate regulations implementing DCO, DCM, and SEF

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

    CEA states that ``[t]he Commission is authorized * * * to make or

    promulgate such rules and regulations as, in the judgment of the

    Commission, are reasonably necessary to effectuate any of the

    provisions or to accomplish any of the purposes of [the CEA].'' The

    requirements that the Governance NPRM proposes apply to all DCOs and

    DCMs, regardless of whether they clear or list swap contracts or only

    commodity futures or options.\18\

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    \18\ As the Conflicts of Interest NPRM states:

    In applying such requirements and limits, the Commission does

    not propose to distinguish between DCMs and SEFs listing swap

    contracts. As mentioned above, such DCMs and SEFs may experience

    sustained competition with respect to the same swap contract, and

    therefore would face the same pressures on self-regulation.

    Additionally, the Commission does not propose to distinguish between

    (i) DCMs listing swap contracts and (ii) DCMs listing only commodity

    futures and options. As mentioned above, clearable swap contracts

    may share sufficiently similar characteristics with certain

    commodity futures and options as to compete with respect to

    execution. Therefore, a DCM listing only commodity futures and

    options may face competition from a SEF with fewer self-regulatory

    requirements, in the same manner as a DCM listing swap contracts.

    Given that the same conflicts of interest may concern both types of

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

    requirements and (ii) limits on the ownership of voting equity and

    the exercise of voting power should apply.

    In addition, the Commission does not propose to distinguish

    between (i) DCOs clearing swap contracts and (ii) DCOs clearing only

    commodity futures and options. Certain standardized swap contracts

    have sufficiently similar risk profiles to commodity futures and

    options that the Commission has, on occasion, permitted such

    products to be commingled and margined within the segregated

    customer account under Section 4d of the CEA. If the Commission

    applied differential (i) structural governance requirements and (ii)

    limits on the ownership of voting equity and the exercise of voting

    power, the Commission risks creating an incentive for regulatory

    arbitrage between the two types of DCO.

    75 FR at 63737. The Commission has requested comment in the

    Conflicts of Interest NPRM regarding this approach. The Commission

    reiterates its request for comment in the context of the Governance

    NPRM.

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    The Governance NPRM reflects consultation with staff of the

    following agencies: (i) The Securities and Exchange Commission (the

    ``SEC''); \19\ (ii) the Board of Governors of the Federal Reserve;

    (iii) the Office of the Comptroller of the Currency; (iv) the Federal

    Deposit Insurance Corporation; and (v) the Treasury Department. The

    Governance NPRM has been further informed by (i) the joint roundtable

    that Commission and SEC staff conducted on August 20, 2010 (the

    ``Roundtable'') \20\ and (ii) public comments posted to the Web site of

    the Commission.\21\ Finally, mindful of the importance of international

    harmonization,\22\ the Governance NPRM incorporates certain elements

    of: (i) The Proposal for a Regulation of the European Parliament and of

    the Council on OTC Derivatives, Central Counterparties, and Trade

    Depositories (the ``European Commission Proposal''); \23\ and (ii) the

    Recommendations for Central Counterparties, drafted by the Committee on

    Payment and Settlement Systems of the Bank for International

    Settlements and the Technical Committee of the International

    Organization of Securities Commissions, dated November 2004 (the ``CCP

    Recommendations'').\24\

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    \19\ Section 765 of the Dodd-Frank Act requires the SEC to

    promulgate rules to mitigate conflicts of interest in the operation

    of (i) a clearing agency that clears security-based swaps, (ii) a

    security-based swap execution facility, or (iii) a national

    securities exchange that posts or makes available for trading

    security-based swaps. Core Principles for security-based swap

    execution facilities are set forth in Section 763 of the Dodd-Frank

    Act.

    \20\ The transcript from the roundtable (the ``Roundtable Tr.'')

    is available at: http://www.cftc.gov/ucm/groups/public/@newsroom/

    documents/file/derivative9sub082010.pdf.

    \21\ Such comments are available at: http://www.cftc.gov/

    LawRegulation/DoddFrankAct/OTC_9_DCOGovernance.html.

    \22\ Currently, the Commission regulates certain entities based

    outside of the United States (e.g., LCH.Clearnet Limited and ICE

    Clear Europe Limited, each of which is based in the United Kingdom).

    \23\ COM(2010) 484/5.

    \24\ The CCP Recommendations are available at: http://

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

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    The Commission requests comment on all aspects of the Governance

    NPRM.

    II. Conflicts of Interest

    As mentioned above, Title VII of the Dodd-Frank Act amended the CEA

    to establish a comprehensive new framework for swaps and certain

    security-based swaps. This framework imposes mandatory clearing and

    trade execution requirements with respect to clearable swap contracts.

    Some market participants, investor advocates, and academics have

    expressed a concern that the enumerated entities have economic

    incentives to minimize the number of swaps subject to mandatory

    clearing and trading. They contend that control of a DCO by the

    enumerated entities, whether through ownership or otherwise,

    constitutes the primary means for keeping swap contracts out of the

    mandatory clearing requirement, and therefore also out of the trading

    requirement. A further contention is that sustained competition between

    DCMs or SEFs may exacerbate certain structural conflicts of

    interest.\25\

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    \25\ This term is defined in 72 FR 6936 (Feb. 14, 2007), which

    includes acceptable practices that the Commission previously adopted

    for the DCM core principle on conflicts of interest.

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    As the Conflicts of Interest NPRM further describes, the potential

    conflicts of interest that the Commission has identified are: Conflicts

    of interest that a DCO may confront when determining (i) whether a

    product is capable of being cleared, (ii) the minimum criteria that an

    entity must meet in order to become and remain a clearing member, and

    (iii) whether a particular entity satisfies such criteria; and

    conflicts of interest that a DCM or SEF may confront in balancing

    advancement of commercial interests and fulfillment of self-regulatory

    responsibilities.

    In addition, the Commission has identified misuse or disclosure of

    non-public information as a conflict of interest that a DCO, DCM, or

    SEF may confront. Certain individuals (e.g., owners, members of the

    Board of Directors, officers, or other employees) will be privy to non-

    public information. Such non-public information could be used or

    disclosed improperly (e.g., to the detriment of competitors), whether

    advertently or inadvertently.

    III. Mitigation of Conflicts of Interest

    To more fully implement the Conflicts of Interest Core Principles,

    the Commission proposes certain requirements related to (i) reporting,

    (ii) identification and mitigation of conflicts of interest, (iii)

    transparency of governance arrangements, and (iv) limitations on use or

    disclosure of non-public information.

    A. Reporting Requirements

    1. DCOs, DCMs, and SEFs

    As mentioned above, the Conflicts of Interest NPRM imposes specific

    compositional requirements on the Boards of Directors and certain

    committees of DCOs, DCMs, and SEFs. In order to facilitate the

    responsibility of the Commission to oversee compliance with such

    requirements, the Governance NPRM proposes to mandate that each DCO,

    DCM, or SEF submit to the Commission within 30 days after each election

    of its Board of Directors:

    A list of all members of the Board of Directors, each

    committee with a composition requirement (including any Executive

    Committee \26\), and each other

    [[Page 725]]

    committee that has the authority to amend or constrain the action of

    the Board of Directors,

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    \26\ The Conflicts of Interest NPRM defines ``Executive

    Committee'' as a committee of the Board of Directors that may

    exercise the authority delegated to it by the Board of Directors

    with respect to the management of the company or organization. See

    proposed Sec. 1.3(ccc). 75 FR at 63747.

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    A description of the relationship, if any, between such

    directors and the registered entity or the members of the registered

    entity (and, in each case, any affiliates thereof),

    The basis for any determination that a director qualifies

    as a Public Director, and \27\

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    \27\ With respect to DCOs, the Commission also requires the

    basis for any determination that a director qualifies as a customer

    representative.

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    A description of how the composition of the Board of

    Directors and each of the abovementioned committees allows the

    registered entity to comply with applicable core principles,

    regulations, as well as to the rules of the registered entity.

    2. DCOs

    As the Conflict of Interest NPRM states:

    swap clearing members at DCOs that currently clear large volumes of

    swap contracts are exclusively enumerated entities. Some have argued

    that the enumerated entities have an incentive to influence DCO risk

    assessments regarding (i) whether a swap contract is capable of

    being cleared, (ii) the appropriate membership criteria for a swap

    clearing member, and (iii) whether a particular entity meets such

    criteria. Therefore, the Commission must carefully consider the

    composition of the Risk Management Committee, in order to achieve

    (i) the increased clearing of swap contracts that the Dodd-Frank Act

    contemplates without compromising (ii) DCO safety and soundness.\28\

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    \28\ 75 FR at 63740.

    The Conflicts of Interest NPRM proposes to require each DCO to have

    an RMC, with at least (i) 35 percent public directors and (ii) 10

    percent customer representatives.\29\ If a DCO would like to have

    greater clearing member participation in risk management, then it may

    cause its RMC to delegate to a subcommittee (the ``RMC Subcommittee'')

    decisions implicating whether (i) a product is capable of being cleared

    and (ii) particular entities or categories of entities are capable of

    performing such clearing. After such delegation the RMC would be free

    of any composition requirements.

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

    of requiring customer representation on the RMC, rather than on the

    DCO Board of Directors.

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    In the abovementioned structure, the RMC Subcommittee reports to

    the RMC, whereas the RMC reports to the DCO Board of Directors.

    Therefore, a DCO governing body that is not subject to the same

    compositional requirements as the RMC or the RMC Subcommittee may

    reject a recommendation or supersede an action thereof.\30\ To enable

    the Commission to determine whether such a rejection or supersession

    originates from a conflict of interest, the Governance NPRM proposes to

    require a DCO to submit a written report to the Commission, whenever

    such a rejection or supersession occurs.\31\ Such report would detail,

    among other things, the rationale for such rejection or supersession.

    This requirement parallels the requirements for central counterparties

    (``CCPs'') in the European Commission Proposal.\32\ The Commission

    anticipates that such a reporting requirement may serve to deter

    conflicts from arising in the first place.

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    \30\ This observation would be true regardless of whether the

    Commission ultimately requires customer representation on the RMC or

    the DCO Board of Directors. However, the Commission requests comment

    on whether the reporting requirement described herein should apply

    to a DCO if the Commission requires the latter and not the former.

    \31\ If, after examination, the Commission determines that such

    rejection or supersession originates from a conflict of interest,

    the Commission may find that the DCO regulatory program (as

    referenced in Section III(b) herein) is non-compliant with DCO Core

    Principle P. Upon making such a finding, the Commission may resort

    to certain administrative remedies (e.g., pursuant to Section 5c(d)

    of the CEA).

    \32\ See Article 26(5) of the European Commission Proposal.

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

    3. DCMs or SEFs

    The Conflicts of Interest NPRM emphasizes the importance of the ROC

    and Membership or Participation Committees in ensuring that the DCM or

    SEF does not prioritize commercial interests over self-regulatory

    responsibilities, including restricting access or imposing burdens on

    access in a discriminatory manner.\33\ As mentioned above, the

    Conflicts of Interest NPRM proposes to require each DCM or SEF to have

    (i) a ROC with all public directors and (ii) a Membership or

    Participation Committee with 35 percent public directors. However, the

    Conflicts of Interest NPRM contemplates that such ROC or Membership or

    Participation Committee would report to the DCM or SEF Board of

    Directors. As such DCM or SEF Board of Directors may not be subject to

    the same composition requirements (or may not have the same members) as

    the ROC or Membership or Participation Committee, the Governance NPRM

    proposes to require a DCM or SEF to submit a written report to the

    Commission whenever such Board of Directors rejects a recommendation of

    the ROC or the Membership or Participation Committee or supersedes an

    action. Such report would detail among other things, the rationale for

    such action. The Commission believes that such a reporting requirement

    would alert it to potential conflicts of interests, as well as deter

    such conflicts from arising in the first place.

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

    \33\ 75 FR 63741.

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

    In addition to the above, the Governance NPRM proposes to require

    the ROC to prepare an annual report to the Board of Directors assessing

    various components of the DCM or SEF regulatory program. Such a

    requirement generally parallels current acceptable practices under DCM

    Core Principle 15.\34\

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

    \34\ Such regulatory program is described further in section

    III(b) herein. The Dodd-Frank Act has redesignated DCM Core

    Principle 15 as DCM Core Principle 16, but has left the actual

    language of the core principle substantively unchanged. See section

    3(ii)(E) under Acceptable Practices for Core Principle 15 in

    Appendix B to Part 38 of the Commission's regulations.

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

    4. Questions \35\

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

    \35\ See note 30 supra.

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

    The Commission requests comment on all aspects of the reporting

    requirements. The Commission further requests comment on the questions

    set forth below.

    Pursuant to Article 31(2) of the European Commission

    Proposal, if a CCP cannot manage, through structural or substantive

    governance arrangements, conflicts of interest that may disadvantage a

    specific member or customer, then that CCP must disclose to that member

    (or customer, if known) the general nature or sources of such

    conflicts. The CCP must make such disclosure before accepting new

    transactions from the affected member, presumably so that such member

    (or customer thereof) may choose to discontinue clearing with the CCP.

    Should the Commission consider imposing a similar requirement on DCOs?

    Why or why not?

    If the Commission decides to impose a similar requirement

    on DCOs, should the Commission extend such a requirement to cover DCMs

    and SEFs? Why or why not?

    B. Regulatory Program

    The Governance NPRM proposes to require that, as part of its

    regulatory program, each DCO, DCM, or SEF must establish, maintain, and

    enforce written procedures to:

    Identify, on an ongoing basis, existing and potential

    conflicts of interest; and

    [[Page 726]]

    Make fair and non-biased decisions in the event of a

    conflict of interest. Such procedures would include rules regarding the

    recusal, when appropriate, of parties involved in the making of

    decisions. The Chief Compliance Officer (for DCOs and SEFs), or the

    Chief Regulatory Officer (for DCMs), shall, in consultation with the

    Board of Directors of the entity or a senior officer of the entity,

    resolve any conflicts of interest.

    The Commission anticipates that the potential conflicts of interest

    that each DCO, DCM, or SEF confronts may change as the swaps market

    evolves under regulation. Consequently, the Commission believes that it

    is appropriate to require a DCO, DCM, or SEF to have a regulatory

    program to monitor existing and potential conflicts of interest on an

    ongoing basis. The Commission intends to permit a DCO, DCM, or SEF to

    contract with a third-party regulatory service provider to fulfill such

    requirement, subject to Commission guidance generally applicable to

    such contractual relationships.\36\

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    \36\ See ``Trading Facilities, Intermediaries, and Clearing

    Organizations; New Regulatory Framework; Final Rule,'' 66 FR 42256,

    42266 (August 10, 2001). Although the relevant discussion focuses on

    DCMs, a similar logic would apply to DCOs. Further, pursuant to the

    Dodd-Frank Act, the Commission is contemplating proposing

    regulations regarding such contractual relationships.

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

    To protect the integrity of trade execution and clearing, the

    Commission believes that it is appropriate to require each DCO, DCM, or

    SEF to have procedures, including recusal procedures, to make fair and

    non-biased decisions in the event of a conflict of interest. Article

    26(4) of the European Commission Proposal includes a similar recusal

    requirement for CCP risk committees. Specifically, if the chairman of a

    CCP risk committee determines that a member has an actual or potential

    conflict of interest on a particular matter, that member would not be

    allowed to vote on that matter.

    1. Questions

    The Commission requests comment on all aspects of the regulatory

    program. The Commission further requests comment on the questions set

    forth below:

    As mentioned above, the Commission intends to permit a

    DCO, DCM, or SEF to contract with a third-party regulatory service

    provider (e.g., the National Futures Association) to implement the

    abovementioned regulatory program. Would a third-party regulatory

    service provider itself ever experience a conflict of interest from the

    performance of its obligations under such a contract? If so, under what

    circumstances?

    Should the Commission propose any other substantive

    requirements with respect to the decision-making process of a DCO, DCM,

    or SEF?

    C. Transparency Requirements

    At the Roundtable, certain market participants emphasized that DCO

    governance arrangements must be transparent to permit the Commission,

    as well as the public, to (i) learn of decisions that have systemic

    importance (e.g., whether a product is capable of being cleared), and

    (ii) identify the governing bodies (e.g., the RMC) responsible for

    making such decisions.\37\ Previously, when the Commission proposed

    acceptable practices for current DCM Core Principle 15 (Conflicts of

    Interest), the Commission recognized the value of transparency in

    ``maintaining market integrity and public trust.'' \38\ Such a

    rationale would appear to also apply to DCOs and SEFs.\39\

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

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

    Swaps and Derivatives Markets Association (``I think that the issue

    is making sure that the risk committees of these DCOs are

    transparent, that you know who the membership is, that the decisions

    that are taken about whether to permit new clearing members and

    whether to permit new products to be listed are transparent and

    readily appraisable, and so that everyone knows, you know, what's

    going on. * * * So this is an open hearing, right? There's a public

    record. There's cameras. There's recordings. The same type of

    transparency should apply to DCO governance so that everyone is

    clear about how decisions are taken and how they're made and who's

    making them.''), Roundtable Tr. at 74-75; and Comments from Randy

    Kroszner, Professor of Economics, Booth School of Business,

    University of Chicago (``I think this gets back to the transparency

    point, but I do think it's extremely important to have people with

    the knowledge, the wherewithal, and with their money on the line

    having input into these risk-management decisions, and I think the

    best way to ensure that is to ensure a very, very transparent

    process so that outsiders can evaluate and provide the commentary

    and the independent directors will have enough wherewithal, enough

    knowledge to know what is going on.''), Roundtable Tr. 78-79.

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

    practices for current DCM core principle 15) (``* * * the current

    market environment mandates enhanced and transparent governance as

    an essential business practice for maintaining market integrity and

    public trust.'').

    \39\ According to Section 4.13.3 of the CCP Recommendations,

    ``[g]overnance arrangements should be clearly specified and publicly

    available.''

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

    In light of the above, the Governance NPRM proposes to establish

    minimum standards for the transparency of the governance arrangements

    of each DCO, DCM, or SEF to relevant authorities (including the

    Commission) as well as the public.\40\ These minimum standards \41\

    require each DCO, DCM, or SEF to:

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

    \40\ The Commission intends to promulgate the transparency

    requirements for DCMs and SEFs pursuant to its authority under DCM

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

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

    promulgate the transparency requirements for DCOs pursuant to its

    authority under DCO Core Principle O (Governance Fitness Standards),

    and Section 8a(5) of the CEA. This core principle requires that a

    DCO establish governance arrangements that are transparent to, among

    other things, fulfill public interest requirements. This core

    principle is interrelated to DCO Core Principle P (Conflicts of

    Interest), since transparency requirements enhance the ability of

    the Commission to detect conflicts of interest, and may serve to

    deter such conflicts. The Commission believes that it has the

    authority to promulgate transparency requirements under either DCO

    Core Principle O or P.

    \41\ As Section III discusses in greater detail, the Commission

    proposes to require DCOs and DCMs to meet additional standards

    regarding the manner in which the Board of Directors considers the

    opinions of market participants, among others.

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

    Make available certain information to the public and

    relevant authorities; \42\

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

    \42\ Such information includes (i) the charter (or mission

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

    statement) of the Board of Directors and certain committees; (iii)

    the Board of Directors nominations process for the registered

    entity, as well as the process for assigning members of the Board of

    Directors or other persons to certain committees; (iv) names of all

    members of (a) the Board of Directors and (b) certain committees;

    (v) the identities of all Public Directors (and with respect to a

    DCO, all customer representatives); (vi) the lines of responsibility

    and accountability for each operational unit of the registered

    entity; and (vii) summaries of significant decisions implicating the

    public interest.

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

    Ensure that the information made available is current,

    accurate, clear and readily accessible; and

    Disclose summaries of certain significant decisions.

    DCM, SEF, and DCO significant decisions involve those areas in

    which conflicts of interest identified in Section II above may be most

    manifest. With respect to a DCM or a SEF, significant decisions would

    relate to access, membership, and disciplinary procedures. With respect

    to a DCO, significant decisions would relate to open access,

    membership, and the finding of products acceptable (or not acceptable)

    for clearing. The Commission proposes to require that the DCO

    specifically disclose whether (i) its Board of Directors has rejected a

    recommendation or superseded an action of the RMC, or (ii) the RMC has

    rejected a recommendation or superseded an action of the RMC

    Subcommittee. The Commission does not intend the foregoing to require a

    DCM, SEF, or DCO to disclose any ``non-public information'' (as

    proposed Sec. 1.3(ggg) defines such term), including, without

    limitation, minutes from meetings of its Board of Directors or

    committees or information that it may have received on a confidential

    basis from an applicant for membership.

    [[Page 727]]

    1. Questions

    The Commission requests comment on all aspects of the transparency

    requirements. The Commission further requests comment on the questions

    set forth below.

    Are the abovementioned proposals necessary or appropriate

    to mitigate DCO, DCM, or SEF conflicts of interest or to ensure that

    DCO governance arrangements are transparent to, among other things,

    fulfill public interest requirements? If not, why not? What would be a

    better alternative?

    Should the Commission require that a DCO, DCM, or SEF make

    available to the public and relevant authorities information other than

    that identified above?

    Has the Commission accurately identified DCO, DCM, or SEF

    significant decisions? Should the Commission explicitly deem any other

    DCO, DCM, or SEF decisions as significant? Conversely, should the

    Commission deem any of the DCO, DCM, or SEF decisions that it has

    identified to be not significant? Why?

    Should the Commission permit a DCO, DCM, or SEF to keep

    confidential any information identified above? If so, why?

    D. Limitation on Use or Disclosure of Non-Public Information

    1. Requirements

    The Governance NPRM proposes to require each DCO, DCM, or SEF to

    establish and maintain written policies and procedures on safeguarding

    non-public information. These policies and procedures must, at a

    minimum, preclude a DCO, DCM, or SEF owner, director, officer, or

    employee from using or disclosing any non-public information gained

    through their interest or position, absent prior written consent from

    the DCO, DCM, or SEF, as applicable.\43\ The Commission intends for

    such requirements to prohibit those in a position of power, either by

    holding a certain position in the organization or through an ownership

    interest, from leveraging such power to benefit, commercially or

    otherwise, from non-public information.\44\ The Commission believes

    that such leveraging would constitute a clear conflict of interest. The

    Commission notes that such requirements comport with certain aspects of

    the European Commission Proposal.\45\

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

    \43\ The Commission recognizes that the disclosure of non-public

    information may be necessary in certain instances, even without the

    written consent of the DCO, DCM, or SEF. Such instances include if

    disclosure is compelled by valid legal process (provided that the

    individual or entity notifies the registered SDR) or required by a

    regulatory authority.

    \44\ For example, a DCO, DCM, or SEF member may use or disclose

    non-public information (e.g., the possibility of disciplinary

    action) to the detriment of its competitor.

    \45\ See Article 26(4) of the European Commission Proposal

    (stating that ``[w]ithout prejudice to the right of competent

    authorities to be duly informed, the members of the risk committee

    shall be bound by confidentiality.'').

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

    The Governance NPRM proposes to define ``non-public information''

    as any information that the DCO, DCM, or SEF owns or any information

    that such entity otherwise deems confidential, such as intellectual

    property belonging to (A) such registered entity or (B) a third party,

    which property such registered entity receives on a confidential basis.

    The Commission will not preclude a DCO, DCM, or SEF from adopting a

    more expansive definition of ``non-public information.''

    2. Questions

    The Commission requests comment on all aspects of the limitation on

    use of non-public information. The Commission further requests comment

    on the questions set forth below.

    Are the abovementioned proposals necessary or appropriate

    to mitigate DCO, DCM, and SEF conflicts of interests? If not, why not?

    What would be a better alternative?

    Has the Commission proposed an appropriate definition for

    ``non-public information''? If not, why not? What would be a better

    alternative?

    Should the Commission consider any other concerns

    regarding the use of ``non-public information''?

    IV. Regulations Implementing Governance Core Principles

    In addition to regulations more fully implementing the Conflicts of

    Interest Core Principles, the Commission also proposes regulations

    implementing DCO and DCM core principles on governance fitness and the

    composition of governing boards. Further, the Commission proposes

    regulations to implement the DCM core principle on diversity of certain

    Boards of Directors.

    A. Governance Fitness Standards

    DCO Core Principle O,\46\ as added by Section 725(c) of the Dodd-

    Frank Act, provides that each DCO shall (i) establish governance

    arrangements that are transparent to fulfill public interest

    requirements and to permit the consideration of the views of owners and

    participants and (ii) establish and enforce appropriate fitness

    standards for (A) directors, (B) members of any disciplinary committee,

    (C) members of the DCO, (D) any other individual or entity with direct

    access to the settlement or clearing activities of the DCO, and (E) any

    party affiliated with any entity mentioned above. DCM Core Principle

    15, as retained by Section 735(b) of the Dodd-Frank Act, provides that

    a DCM shall establish and enforce appropriate fitness standards for (i)

    directors, (ii) members of any disciplinary committee, (iii) members of

    the DCM, (iv) any other person with direct access to the facility, and

    (v) any person affiliated with any entity mentioned above.

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

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

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

    1. Fitness Requirements

    To implement DCM Core Principle 15 and partially implement DCO Core

    Principle O, the Governance NPRM proposes to require each DCM and DCO

    to specify and enforce fitness standards for (i) directors, (ii)

    members of any Disciplinary Panel,\47\ and (iii) members of the

    Disciplinary Committee.\48\ These standards shall include, at a

    minimum, (i) those bases for refusal to register a person under Section

    8a(2) of the CEA,\49\ and (2) the absence of a significant history of

    serious disciplinary offenses, such as those that would be

    disqualifying under Sec. 1.63 of the Commission's regulations.\50\

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

    \47\ The Conflicts of Interest NPRM defines ``Disciplinary

    Panel'' as a panel that shall be responsible for conducting

    hearings, rendering decisions, and imposing sanctions with respect

    to disciplinary matters. See proposed Sec. 40.9(c)(3)(i). 75 FR at

    63752.

    \48\ Section 1.63 of the Commission's regulations defines

    ``Disciplinary Committee'' as a person or committee of persons, or

    any subcommittee thereof, that is authorized by a self-regulatory

    organization to issue disciplinary charges, to conduct disciplinary

    proceedings, to settle disciplinary charges, to impose disciplinary

    sanctions or to hear appeals thereof. See 17 CFR 1.63.

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

    under Section 8a(2) of the CEA include, among other things,

    suspension or revocation of registration, certain court orders

    prohibiting action in the capacity of a registrant under the CEA,

    certain felony convictions, or findings of violation of the CEA or

    certain other Federal statutes.

    \50\ 17 CFR 1.63. Such offenses include violations of certain

    self-regulatory organization rules and violations of the CEA or the

    Commission's regulations thereunder.

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

    Also, the Governance NPRM proposes to require each DCM and DCO to

    specify and enforce fitness standards for (i) its members and

    affiliates \51\ thereof, (ii) persons with direct access to the DCM or,

    in the case of a DCO, to its settlement and clearing activities, (iii)

    natural persons who, directly or indirectly, own greater than ten

    percent of any one class

    [[Page 728]]

    of equity interest in a DCM or DCO,\52\ and (v) parties affiliated with

    (A) directors, (B) members of any Disciplinary Panel, and (C) members

    of the Disciplinary Committee.\53\ At a minimum, such standards shall

    include those bases for refusal to register a person under Section

    8a(2) of the CEA.\54\

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

    \51\ The Governance NPRM proposes to define ``affiliate'' as a

    person that directly, or indirectly through one or more

    intermediaries, controls, is controlled by, or is under common

    control with, a registered entity.

    \52\ This provision is a clarification of acceptable practices

    under current DCM Core Principle 14.

    \53\ Currently, the Governance NPRM does not propose to impose

    any requirement on each DCM and DCO with respect to fitness

    standards for affiliates of persons with direct access. Therefore,

    under Section 5(d)(1)(B) of the CEA, as added by Section 735 of the

    Dodd-Frank Act, each DCM has reasonable discretion in comporting

    with DCM Core Principle 15 with respect to such affiliates. Also,

    under Section 5b(c)(2)(A)(ii) of the CEA, as added by Section 725 of

    the Dodd-Frank Act, each DCO retains similar discretion.

    \54\ See note 49 supra.

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

    Further, the Governance NPRM proposes to require each DCM and DCO

    to collect and verify information that supports compliance with the

    standards articulated above and provide that information to the

    Commission annually.

    The abovementioned proposals codify the acceptable practices under

    current DCM Core Principle 14 (Governance Fitness Standards) and extend

    such practices to DCOs.\55\ The Commission believes that such proposals

    are appropriate to ensure the integrity of individuals and entities

    specified above. Such integrity, in turn, allows DCMs and DCOs to

    operate in the best interests of the public.\56\

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

    \55\ DCM Core Principle 14 is redesignated as DCM Core Principle

    15 under the Dodd-Frank Act.

    \56\ DCMs facilitate the execution of, and DCOs provide clearing

    for, ``* * * transactions * * * affected with a national public

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

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

    In addition to the above, the Governance NPRM proposes to mandate

    that members and certain other persons must agree to become subject to

    the jurisdiction of the DCM or the DCO, as a condition of access. Such

    a proposal ensures that a DCM or DCO, each of which has self-regulatory

    responsibilities, would be able to appropriately discipline a member or

    such other person for violation of DCM or DCO rules. The Commission

    believes that a DCM or DCO must have the ability to exert such

    discipline in order to ensure the fitness of members or such other

    persons.

    2. Questions

    The Commission requests comment on all aspects of the governance

    fitness standards. Specifically, the Commission requests comment on the

    questions set forth below.

    Are the abovementioned proposals necessary or appropriate

    to implement DCM Core Principle 15 and DCO Core Principle O? If not,

    why not? What would be a better alternative?

    Should the Commission propose any minimum fitness

    standards other than those specified above?

    Is the Commission's proposed definition of affiliate

    appropriate? If not, why?

    B. Transparency Requirements

    As mentioned above, DCO Core Principle O \57\ provides that each

    DCO shall establish governance arrangements that are transparent to

    fulfill public interest requirements.\58\ Section III(C) of the

    Governance NPRM discusses proposals to implement such portion of the

    core principle. However, DCO Core Principle O also provides that each

    DCO shall establish governance arrangements that are transparent to

    permit the consideration of the views of owners and participants. Such

    language appears unique to DCOs. Hence, the Governance NPRM sets forth

    the following additional proposals for DCOs:

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

    \58\ To comport with the European Commission Proposal, the

    Commission has additionally interpreted DCO Core Principle O to

    require governance arrangements that are well-defined and that

    include a clear organizational structure with consistent lines of

    responsibility and effective internal controls.

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

    Each DCO shall make available to the public, as well as

    relevant authorities (including the Commission), a description of the

    manner in which its governance arrangements permit the consideration of

    the views of owners (whether voting or non-voting) and its

    participants, including, without limitation, clearing members and

    customers;

    Such description shall include, at a minimum:

    [cir] The general method by which the DCO learns of the views of

    owners (other than through the exercise of voting power) and

    participants (other than through representation on the DCO Board of

    Directors or any DCO committee); and

    [cir] The manner in which the DCO considers such views.

    1. Questions

    The Commission requests comment on all aspects of the additional

    proposals. Specifically, the Commission requests comment on the

    questions set forth below.

    Are such additional proposals necessary or appropriate to

    implement DCO Core Principle O? If not, why not? What would be a better

    alternative?

    Should the Commission propose to require that each DCO

    make available to the public, as well as relevant authorities,

    information other than that identified above?

    C. Composition of the Board of Directors

    1. DCMs

    DCM Core Principle 17,\59\ as amended by Section 735(b) of the

    Dodd-Frank Act,\60\ provides that the governance arrangements of a DCM

    shall be designed to permit consideration of the views of market

    participants. To implement this provision, the Governance NPRM proposes

    to require each DCM to design and institute a process for considering

    the range of opinions that market participants hold with respect to (i)

    the functioning of an existing market (including governance

    arrangements) and (ii) new rules or rule amendments. The Commission

    intends to permit each DCM to have the flexibility to determine the

    process that is most appropriate for its market participants. The

    Commission notes that one process by which a DCM may fulfill DCM Core

    Principle 17 is to have market participants on its Board of Directors

    (or other governing bodies). Regardless of the process that a DCM

    chooses, the Governance NPRM requires the DCM to make a description of

    such process available to the public and to relevant authorities

    (including the Commission) as part of its compliance with the

    transparency requirements described in Section III(C) above.\61\

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

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

    \60\ The Dodd-Frank Act redesignated DCM Core Principle 16

    (Composition of Boards of Mutually Owned Contract Markets) as DCM

    Core Principle 17 (Composition of Governing Boards of Contract

    Markets), and amended the language of the core principle. Former DCM

    Core Principle 16 stated: ``In the case of a mutually owned contract

    market, the board of trade shall ensure that the composition of the

    governing board reflects market participants.'' DCM Core Principle

    17, as amended by the Dodd-Frank Act states that ``[t]he governance

    arrangements of the board of trade shall be designed to permit

    consideration of the views of market participants.''

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

    a. Questions.

    The Commission requests comment on this proposal. Specifically, the

    Commission requests comment on the questions set forth below.

    Is the abovementioned proposal appropriate to implement

    DCM Core Principle 17? What would be a better alternative? What are the

    costs and benefits of the abovementioned proposals? What are the costs

    and benefits of any alternative?

    Does the Commission need to consider proposing any

    additional requirements in order to implement DCM Core Principle 17?

    What would be the costs and benefits of any such requirement?

    [[Page 729]]

    2. DCOs

    DCO Core Principle Q, as added by Section 725(c) of the Dodd-Frank

    Act, provides that each DCO shall ensure that the composition of the

    governing board or committee of the DCO includes market participants.

    In partial reliance on this core principle, the Conflicts of Interest

    NPRM proposed requiring that the RMC (or the RMC Subcommittee) be

    composed of at least 10 percent customer representatives. However,

    based on comments that the Commission received on the Conflicts of

    Interest NPRM,\62\ certain market participants would prefer that the

    DCO Board of Directors, rather than the RMC, include customer

    representation.\63\ Therefore, the Commission is reconsidering whether

    requiring customer representation on the RMC or the DCO Board of

    Directors would better implement both Section 726 of the Dodd-Frank Act

    and DCO Core Principle Q. Preliminarily, the Commission is not inclined

    to require customer representation on both the RMC and the DCO Board of

    Directors, as the former reports to the latter. As members of the DCO

    Board of Directors, customer representatives would have the opportunity

    to (i) review recommendations and actions of the RMC, (ii) request the

    rationale behind such recommendations and actions, and (iii) vote to

    reject such recommendations and to supersede such actions.

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

    \62\ The comment period for the Conflicts of Interest NPRM

    closed on November 17, 2010. Comments are available at: http://

    comments.cftc.gov/PublicComments/CommentList.aspx?id=861.

    \63\ See, e.g., Comment from the Investment Company Institute,

    dated November 17, 2010 (stating that ``[t]he Commissions' proposals

    include provisions that would allow for industry representation on

    board advisory committees. The CFTC proposal, for example,

    specifically includes a requirement that 10 percent of the Risk

    Management Committee of a swap entity be composed of customers of

    clearing members who also routinely execute swap contracts and who

    have experience in using pricing models for such contracts. We

    strongly support investor representation on board advisory

    committees. These committees are designed to facilitate meaningful

    discussion on important issues before the board. Nevertheless, such

    advisory committee representation should not be a substitute for

    investor representation on the board itself. This is particularly

    true in the developing swap markets where, at this time, investors

    have access to only a handful of swap entities for clearing and

    trading.''). C.f. Comment from BlackRock, dated November 15, 2010

    (stating that '' [t]he essence of BlackRock's comments is that buy-

    side participants, like customers of clearing members, need

    meaningful representation on the committees that make the critical

    determinations on the core functions of the organization that impact

    all of its participants. Such representation is more important than

    fair representation on the Board of Directors because the governance

    committees, such as the Risk Management Committee, will have

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

    Proposing Release would charge the Risk Management Committee with

    determining products eligible for clearing, setting standards and

    requirements for initial and continuing clearing membership

    eligibility, and advising the Board of Directors on the DCO's risk

    model and default procedures. See Proposed Rule 39.13(g)(1), 75 FR

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

    Committee will have profound and immediate impacts on all DCO

    constituencies, including customers.'').

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

    Based on the above, the Commission is proposing to require that a

    DCO Board of Directors include at least 10 percent customer

    representatives. However, in case the Commission decides to keep such

    requirement at the RMC level, the Commission is alternatively re-

    proposing that the RMC (or the RMC Subcommittee) be composed of at

    least 10 percent customer representatives. As mentioned above, the

    Commission is preliminarily anticipating that it would adopt only one

    requirement on customer representation. The Commission is not

    anticipating making a final decision regarding customer representation

    until it finishes reviewing comments on the Governance NPRM.

    a. Questions.

    The Commission requests comment on all aspects of the

    abovementioned proposal. Specifically, the Commission requests comment

    on the questions set forth below.

    Should the Commission require customer representation on

    the DCO Board of Directors instead of the RMC (or RMC Subcommittee)?

    Why or why not? What are the benefits and costs of such requirement?

    Alternatively, should the Commission require customer

    representation on the RMC (or the RMC Subcommittee) instead of the DCO

    Board of Directors? Why or why not? What are the benefits and costs of

    such requirement?

    Should the Commission consider requiring customer

    representation on both the DCO Board of Directors and the RMC? Why or

    why not?

    Alternatively, should the Commission consider requiring

    customer representation on another committee, but neither the DCO Board

    of Directors nor the RMC? Why or why not? Which committee would be most

    appropriate? For example, the Nominating Committee?

    What percentage or number of customer representatives

    should the Commission require on the DCO Board of Directors? Should

    such percentage be higher or lower than 10 percent? What should such

    number be? What are the benefits and costs of each percentage or

    number?

    Alternatively, what percentage or number of customer

    representatives should the Commission require on the RMC? Should such

    percentage be higher or lower than 10 percent? What should such number

    be? What are the benefits and costs of each percentage or number?

    To the extent that the Commission requires customer

    representatives on either the DCO Board of Directors or the RMC, should

    the Commission consider imposing any additional requirement to ensure

    that these representatives appropriately weigh the interests of all

    customers, rather than just advocate on behalf of the entity to which

    such representative belongs?

    D. Diversity of DCM Board of Directors

    DCM Core Principle 22, as added by Section 735(b) of the Dodd-Frank

    Act, provides that a DCM, if a publicly-traded company, shall endeavor

    to recruit individuals to serve on its Board of Directors and its other

    decision-making bodies (as determined by the Commission) from among,

    and to have the composition of the bodies reflect, a broad and

    culturally diverse pool of qualified candidates.

    To implement DCM Core Principle 22, the Governance NPRM proposes to

    permit each publicly-traded DCM the flexibility to determine (i) the

    standards by which a Board of Directors could be deemed broad and

    culturally diverse, and (ii) the manner in which the DCM Board of

    Directors meets that standard. The Governance NPRM proposes that each

    such DCM make available its diversity standards to the public and

    relevant authorities (including the Commission) as part of its

    compliance with the transparency requirements described in Section

    III(C) above. Further, the Governance NPRM proposes that each such DCM

    provide the Commission with an annual certification of the manner in

    which its Board of Directors meets its diversity standards. If such a

    DCM concludes that its Board of Directors does not yet meet such

    standards, then the Governance NPRM proposes that the DCM describe the

    manner in which its Nominating Committee is structuring recruiting

    efforts to meet such standards. The Commission is not currently

    proposing diversity requirements for any other DCM decision-making

    bodies. The Commission interprets DCM Core Principle 22 to apply only

    to DCMs that are publicly-traded. This does not include DCMs that are

    not publicly-traded but have one or more affiliates that are.

    [[Page 730]]

    1. Questions

    The Commission requests comment on all aspects of the diversity

    requirement. Specifically, should the Commission extend such

    requirement to other DCM decision-making bodies? Why or why not? If the

    Commission proposes to extend such requirement, which decision-making

    bodies should it consider?

    V. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \64\ requires that agencies

    consider whether the regulations they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis respecting the impact.\65\

    The proposed rules detailed in the Governance NPRM would only affect

    DCOs, DCMs, and SEFs. The Commission has previously determined that

    DCOs \66\ and DCMs \67\ are not ``small entities'' for purposes of the

    RFA. In contrast, SEFs are a new category of registrant that the Dodd-

    Frank Act created. Accordingly, the Commission has not addressed the

    question of whether SEFs are, in fact, ``small entities'' for purposes

    of the RFA.

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

    \64\ 5 U.S.C. 601 et seq.

    \65\ Id.

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

    \67\ 47 FR 18618, 18619 (April 30, 1982).

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

    The Dodd-Frank Act defines a SEF to mean ``a trading system or

    platform in which multiple participants have the ability to execute or

    trade swaps by accepting bids and offers made by multiple participants

    in the facility or system, through any means of interstate commerce,

    including any trading facility that (A) facilitates the execution of

    swaps between persons and (B) is not a designated contract market.''

    \68\ The Commission hereby determines that SEFs not be considered

    ``small entities'' for essentially the same reasons that DCMs and DCOs

    have previously been determined not to be small entities. These reasons

    include the fact that the Commission designates a contract market or

    registers a derivatives clearing organization only when it meets

    specific criteria including expenditure of sufficient resources to

    establish and maintain adequate self-regulatory programs. Likewise, the

    Commission will register an entity as a SEF only after it has met

    specific criteria including the expenditure of sufficient resources to

    establish and maintain an adequate self-regulatory program.\69\

    Accordingly, the Commission does not expect the rules, as proposed

    herein, to have a significant impact on a substantial number of small

    entities. Therefore, the Chairman, on behalf of the Commission, hereby

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

    will not have a significant economic impact on a substantial number of

    small entities. The Commission invites the public to comment on whether

    SEFs covered by these rules should be considered small entities for

    purposes of the RFA.

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

    \68\ See Section 721 of the Dodd-Frank Act. The Commission is

    contemplating proposing regulations that would further specify those

    entities that must register as a SEF. The Commission does not

    believe that such proposals would alter its determination that a SEF

    is not a ``small entity'' for purposes of the RFA.

    \69\ See Core Principle 2 applicable to SEFs under Section 733

    of the Dodd-Frank Act.

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    B. Paperwork Reduction Act

    The Governance NPRM contains information collection requirements.

    The Paperwork Reduction Act of 1995 (``PRA'') \70\ imposes certain

    requirements on Federal agencies (including the Commission) in

    conducting or sponsoring any ``collection of information'' (as the PRA

    defines such term). Pursuant to the PRA, the Commission has submitted

    to the Director of the Office of Management and Budget (``OMB''), an

    explanation, as well as details, of the information collection and

    recordkeeping requirements which would be necessary to implement the

    Governance NPRM.

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

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

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

    1. Information Provided by Reporting Entities/Persons

    If the Governance NPRM is promulgated in final form, they would

    require DCOs, DCMs, and new SEF registrants to collect and submit,

    pursuant to parts 37 to 40 of the Commission's regulations, certain

    information to the Commission, which such regulations have never

    previously required. For each such proposed requirement, set forth

    below are estimates of: (i) The number of respondents; (ii) the number

    of annual responses by each respondent; (iii) the average hours per

    response; and (iv) the aggregate annual reporting burden (in hours as

    well as dollars). New OMB control numbers will be assigned to these

    proposed information collection requirements.

    New Collection 3038-NEW

    Sections 37.1201(b)(5) and 38.851(b)(5) of the Commission's

    regulations require each SEF and DCM, respectively, to provide to the

    Commission on an annual basis a report assessing the regulatory program

    of the SEF or DCM, including (i) the description of such program, (ii)

    expenses, (iii) staffing and structure, (iv) certain disciplinary

    matters, and (v) with respect to a SEF only, the performance of the

    chief compliance officer (as referenced in Section 5(f)(15) of the

    Act).

    OMB Control Number 3038-NEW.

    Estimated number of respondents: 51.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 20.

    Aggregate annual reporting burden in hours: 1,020.

    Aggregate annual reporting burden in dollars: $121,125.00.

    New Collection 3038-NEW

    Sections 37.1201(d) and 38.851(d) of the Commission's regulations

    require a SEF and DCM, respectively, to submit a report to the

    Commission detailing five items of information in the event that the

    SEF or DCM Board of Directors rejects a recommendation or supersedes an

    action of the Regulatory Oversight Committee or the Membership or

    Participation Committee (or entity performing the functions of such

    committee). Similarly, Sec. 39.25(b) of the Commission's regulations

    requires a DCO to submit a report to the Commission detailing five

    items of information in the event that (i) the DCO Board of Directors

    rejects a recommendation or supersedes an action of the RMC or (ii) the

    RMC rejects a recommendation or supersedes an action of the RMC

    Subcommittee.

    OMB Control Number 3038-NEW

    Estimated number of respondents: 70.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 15.

    Aggregate annual reporting burden in hours: 1,050.

    Aggregate annual reporting burden in dollars: $124,688.

    New Collection 3038-NEW

    Sections 38.801(d) and 39.24(b)(4) of the Commission's regulations

    require each DCM and DCO, respectively, to provide to the Commission

    information on an annual basis that supports compliance with certain

    governance fitness standards.

    OMB Control Number 3038-NEW

    Estimated number of respondents: 35.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 8.

    Aggregate annual reporting burden in hours: 280.

    Aggregate annual reporting burden in dollars: $33,250.00.

    [[Page 731]]

    New Collection 3038-NEW

    Section 38.901(c) of the Commission's regulations requires each DCM

    to make available to the public and the Commission a description of its

    process for considering the range of opinions that market participants

    hold with respect to (i) the functioning of an existing market

    (including governance arrangements) and (ii) new rules or rule

    amendments. Section 39.24(a) of the Commission's regulations requires

    each DCO to make available to the public and to the relevant

    authorities, including the Commission, a description of the manner in

    which its governance arrangements permit the consideration of the views

    of its owners, whether voting or non-voting, and its participants,

    including, without limitation, clearing members and customers.

    OMB Control Number 3038-NEW

    Estimated number of respondents: 35.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 15.

    Aggregate annual reporting burden in hours: 525.

    Aggregate annual reporting burden in dollars: $62,344.00.

    New Collection 3038-NEW

    Section 38.1151(d) of the Commission's regulations requires each

    DCM that is publicly listed on a domestic exchange to (i) make

    available to the public and the Commission the standards by which its

    Board of Directors shall be deemed broadly and culturally diverse, and

    (ii) certify to the Commission on an annual basis whether and how its

    Board of Directors has met certain diversity standards.

    OMB Control Number 3038-NEW

    Estimated number of respondents: 16.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 15.

    Aggregate annual reporting burden in hours: 240.

    Aggregate annual reporting burden in dollars: $28,500.00.

    New Collection 3038-NEW

    Section 40.9(b) of the Commission's regulations requires each DCO,

    DCM, or SEF to submit to the Commission, within 30 days after the

    election of the Board of Directors, (i) a list of all members of the

    Board of Directors, each committee with a composition requirement

    (including any Executive Committee), and each other committee with the

    authority to amend or constrain the action of the Board of Directors,

    (ii) a description of the relationship, if any, between such directors

    and the registered entity or the members of the registered entity (and,

    in each case, any affiliates thereof), (iii) the basis for any

    determination that a director qualifies as a Public Director (and with

    respect to DCOs only, as a customer representative), and (iv) a

    description of how the composition of the Board of Directors and each

    of the abovementioned committees allows the DCO, DCM, or SEF to comply

    with applicable core principles, regulations, as well as to its rules.

    OMB Control Number 3038-NEW

    Estimated number of respondents: 70.

    Annual responses by each respondent: 1.

    Estimated average hours per response: 2.

    Aggregate annual reporting burden in hours: 140.

    Aggregate annual reporting burden in dollars: $16,625.00.

    New Collection 3038-NEW

    Section 40.9(d) of the Commission's regulations requires each DCO,

    DCM or SEF to make certain information regarding its governance

    arrangements available to the public and the Commission on a current

    basis.\71\

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

    \71\ See note 42 supra.

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

    OMB Control Number 3038-NEW

    Estimated number of respondents: 70.

    Annual responses by each respondent: 4.

    Estimated average hours per response: 10.

    Aggregate annual reporting burden in hours: 2,800.

    Aggregate annual reporting burden in dollars: $332,500.

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the proposed information collection

    requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the

    Commission will consider public comments on such proposed requirements

    in:

    Evaluating whether the proposed collections of information

    are necessary for the proper performance of the functions of the

    Commission, including whether the information will have a practical

    use;

    Evaluating the accuracy of the estimated burden of the

    proposed information collection requirements, including the degree to

    which the methodology and the assumptions that the Commission employed

    were valid;

    Enhancing the quality, utility, and clarity of the

    information proposed to be collected; and

    Minimizing the burden of the proposed information

    collection requirements on DCOs, DCMs, and SEFs, including through the

    use of appropriate automated, electronic, mechanical, or other

    technological information collection techniques, e.g., permitting

    electronic submission of responses.

    Copies of the submission from the Commission to OMB are available

    from the CFTC Clearance Officer, 1155 21st Street, NW., Washington, DC

    20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and

    individuals desiring to submit comments on the proposed information

    collection requirements should send those comments to the OMB Office of

    Information and Regulatory Affairs at:

    The Office of Information and Regulatory Affairs, Office

    of Management and Budget, Room 10235, New Executive Office Building,

    Washington, DC 20503, Attn: Desk Officer of the Commodity Futures

    Trading Commission;

    (202) 395-6566 (fax); or

    OIRAsubmissions@omb.eop.gov (e-mail).

    2. Information Collection Comments

    Please provide the Commission with a copy of submitted comments so

    that all comments can be summarized and addressed in the final rule

    preamble. Please refer to the ADDRESSES section of the Governance NPRM

    for instructions on submitting comments to the Commission.

    OMB is required to make a decision concerning the proposed

    information collection requirements between thirty (30) and sixty (60)

    days after publication of the Governance NPRM in the Federal Register.

    Therefore, a comment to OMB is best assured of receiving full

    consideration if OMB (as well as the Commission) receives it within

    thirty (30) days of publication of the Governance NPRM.

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \72\ requires that the Commission, before

    promulgating a regulation or issuing an order, consider the costs and

    benefits of its action. By its terms, section 15(a) of the CEA does not

    require the Commission to quantify the costs and benefits of a new

    regulation or to determine whether the benefits of the regulation

    outweigh its costs. Rather, section 15(a) of the CEA simply requires

    [[Page 732]]

    the Commission to ``consider the costs and benefits'' of its action.

    Section 15(a) of the CEA further specifies that costs and benefits

    shall be evaluated in light of the following considerations: (1)

    Protection of market participants and the public; (2) efficiency and

    competition; (3) financial integrity of the futures markets and price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. Accordingly, the Commission could in its

    discretion, give greater weight to any one of the five considerations

    and could determine that, notwithstanding its costs, a particular

    regulation was necessary or appropriate to protect the public interest

    or to effectuate any of the provisions or to accomplish any of the

    purposes of the Act.

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

    \72\ 7 U.S.C. 19(a).

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

    1. The Conflicts of Interest Core Principles: Proposed Regulations

    a. Reporting.

    As mentioned above, Sec. Sec. 37.1201(b)(5) and 38.851(b)(5) of

    the Commission's proposed regulations require each SEF and DCM,

    respectively, to provide to the Commission an annual assessment report.

    In addition, as mentioned above, Sec. Sec. 37.1201(d) and

    38.851(d) of the Commission's proposed regulations require a DCO, DCM,

    or SEF, as appropriate, to submit a report to the Commission whenever

    certain committees are overruled and Sec. 40.9(b) of the Commission's

    proposed regulations requires each DCO, DCM, or SEF to submit to the

    Commission post-Board election information.

    b. Transparency of Governance Arrangements.

    As mentioned above, Sec. 40.9(d) of the Commission's proposed

    regulations requires each DCO, DCM or SEF to make certain information

    regarding its governance arrangements available to the public and the

    Commission on a current basis.

    c. Identification and Mitigation of Conflicts of Interest.

    Section 40.9(e) of the Commission's proposed regulations require

    each DCO, DCM, or SEF to establish, maintain, and enforce written

    procedures to identify existing and potential conflicts of interest,

    and to make decisions in the event of a conflict of interest. The

    Commission recognizes that such requirements impose costs. Such costs

    may be ameliorated to the extent that certain DCOs or DCMs may modify

    existing practices to accommodate proposed Sec. 40.9(e).\73\

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

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

    (``CME'') (Avoiding Conflicts of Interest in ``Significant

    Actions''), available at: http://www.cmegroup.com/rulebook/CME/I/2/

    34.html.

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

    d. Limitations on Use or Disclosure of Non-Public Information.

    As more fully described above, Sec. 40.9(f) of the Commission's

    proposed regulations requires each DCO, DCM, or SEF to establish and

    maintain written policies and procedures on safeguarding non-public

    information. The Commission recognizes that such requirements impose

    costs. Such costs may be ameliorated to the extent that certain DCOs or

    DCMs may modify existing practices to accommodate proposed Sec.

    40.9(f).\74\

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

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

    and Audit Departments, available at: http://www.cmegroup.com/market-

    regulation/overview/files/confidentialitypolicy.pdf.

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

    2. The Costs and Benefits of Regulations Implementing the Conflicts of

    Interest Core Principles

    As Section II herein mentions, a DCO may face conflicts of interest

    resulting from control by enumerated entities. Such conflicts may have

    detrimental effects on the public because they may impede the mandatory

    clearing of swaps.\75\ Also, such conflicts may evidence less sound

    risk management practices, as such conflicts may cause a DCO to make

    decisions regarding, e.g., membership, based on the commercial

    interests of certain clearing members, rather than on objective risk

    criteria. Further, such conflicts may also have detrimental effects on

    market participants, as well as on efficiency and competition, because

    such conflicts may result in non-risk-based constraints on the number

    of futures commission merchants available to clear swaps, which may

    increase the price that certain market participants must bear in order

    to obtain clearing. Finally, such conflicts may have detrimental

    effects on price discovery because, by impeding the mandatory clearing

    of swaps, they may also impede the trading of swaps on a SEF or DCM.

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

    \75\ The Conflicts of Interest NPRM states: ``The framers of the

    Dodd-Frank Act observe that the clearing of swap contracts

    constitutes a key means for managing systemic risk, because clearing

    removes the type of interconnectedness between financial

    institutions that contributed to the financial crisis resulting from

    the failure and bankruptcy of firms such as Bear Stearns, Lehman

    Brothers, and AIG.'' 75 FR at 63736.

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

    Section II also states that sustained competition between DCMs or

    SEFs may exacerbate certain structural conflicts of interest. Such

    structural conflicts may lead a DCM or SEF to prioritize commercial

    interests over self-regulatory responsibilities, including restricting

    access or imposing burdens on access in a discriminatory manner. Such

    structural conflicts may have a detrimental effect on price discovery,

    as prices are best discovered in a market with broad participation.

    Broad participation generally results in higher liquidity. Because of

    its effect on price discovery, such structural conflicts may also have

    a detrimental effect on market participants, and ultimately, the

    public. Certain market participants may face higher fees to access a

    DCM or SEF. Others may not be able to access a DCM or SEF at all. To

    the extent that such market participants are executing transactions to

    hedge price risk (whether their own or those of end-users), increased

    costs associated with a hedge (or the inability to execute a hedge) may

    be passed on to consumers. Finally, such structural conflicts may have

    a detrimental effect on efficiency and competition, as certain market

    participants may be precluded from competing to execute at a lower

    price for end-users.

    As mentioned above, the Governance NPRM proposes substantive

    requirements that, together with the proposals in the Conflicts of

    Interest NPRM (i.e., structural governance requirements and limitations

    on ownership of voting equity and the exercise of voting rights),

    mitigate the conflicts of interest described in Section II, and

    therefore, the detrimental effects resulting from such conflicts. The

    Commission believes that the benefits of such mitigation exceed the

    costs for DCOs, DCMs, and SEFs to implement the Governance NPRM. The

    Commission welcomes comment on its determination.

    3. Regulations Implementing DCM and DCO Core Principles

    a. Governance Fitness.

    As mentioned above, Sec. Sec. 38.801(d) and 39.24(b)(4) of the

    Commission's proposed regulations require each DCM and DCO,

    respectively, to (i) specify and enforce fitness standards for

    directors, members, and certain other persons, and (ii) provide to the

    Commission information on an annual basis that supports compliance with

    such standards. For DCMs, the proposed regulations are simply

    codifications of current acceptable practices. Therefore, the proposed

    regulations should impose minimal additional costs. For DCOs,

    governance fitness standards are necessary to ensure sound risk

    management practices, and therefore the protection of market

    participants and the public. The proposed regulations should impose

    minimal costs on DCOs.

    Certain DCOs are divisions of DCMs, which means that they may

    already apply current acceptable practices to

    [[Page 733]]

    their directors, members, and other persons. All DCOs are currently

    subject to DCO Core Principle B,\76\ which requires each to have

    ``adequate * * * managerial resources to discharge the responsibilities

    of a DCO.'' Thus, the Commission preliminary believes that the benefits

    of DCM and DCO governance fitness standards exceed the costs of such

    standards. The Commission welcomes comment on its determination.

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

    \76\ 7 U.S.C. 7a-1(c)(B).

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

    b. Composition of Governing Boards.

    As mentioned above, Sec. 38.901(a) of the Commission's proposed

    regulations requires DCM governance arrangements to be designed to

    permit consideration of the views of market participants.

    Preliminarily, the Commission believes that such benefit exceeds any

    costs associated with Sec. 38.901(c), which may be idiosyncratic to

    each DCM. However, the Commission notes that it has specifically

    requested comment on the costs and benefits of Sec. 38.901(c), as well

    as any alternative thereto.

    Core Principle Q requires each DCO to ensure that its governing

    board or committee includes market participants. Section 39.26 of the

    Commission's proposed regulations requires each DCO Board of Directors

    to include 10 percent representatives of customers. Preliminarily, the

    Commission believes that the benefit of such customer representation

    exceeds any cost associated with Sec. 39.26.\77\ However, the

    Commission notes that it has specifically requested comment on the

    costs and benefits of Sec. 39.26, as well as any alternative thereto.

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

    \77\ For example, in addition to implementing DCO Core Principle

    Q, certain comments on the Conflicts of Interest NPRM state that

    customer representation on the DCO Board of Directors would be a

    better method of ameliorating conflicts of interest under Section

    726 of the Dodd-Frank Act. See note 63 supra. See generally, 75 FR

    at 63746 (discussing the costs and benefits of the Conflicts of

    Interest NPRM).

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

    Alternatively, Sec. 39.13(g)(3)(i) of the Commission's proposed

    regulations requires each RMC (or RMC Subcommittee) to include 10

    percent representatives of customers. As mentioned above, the Conflicts

    of Interest NPRM had previously proposed such requirement. Therefore,

    the costs and benefits of Sec. 39.13(g)(3)(i) have been addressed in

    the Conflicts of Interest NPRM.\78\

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

    \78\ See generally, 75 FR at 63746.

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

    c. Regulation Implementing the DCM Core Principle on Diversity of

    Certain Boards of Directors.

    As mentioned above, DCM Core Principle 22, as added by Section

    735(b) of the Dodd-Frank Act, provides that a DCM, if a publicly-traded

    company, shall endeavor to recruit individuals to serve on its Board of

    Directors and its other decision-making bodies (as determined by the

    Commission) from among, and to have the composition of the bodies

    reflect, a broad and culturally diverse pool of qualified candidates.

    Section 38.1151(d) of the Commission's proposed regulations affords

    flexibility to each such DCM \79\ to determine the standards by which a

    Board of Directors may be deemed broadly and culturally diverse.

    Further, such section requires the DCM to (i) make available to the

    public and the Commission such standards, and (ii) certify to the

    Commission on an annual basis whether and how its Board of Directors

    has met certain standards. The benefit of cultural diversity on Boards

    of Directors in enhancing the efficiency of organizations has been

    recognized.\80\ Preliminarily, the Commission believes that the benefit

    of Sec. 38.1151(d) exceeds its costs. The Commission welcomes comment

    on its preliminary determination.

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

    \79\ Currently, no such DCM exists.

    \80\ For example, SEC Commissioner Luis Aguilar made the

    following remarks at an SEC Open Meeting held on July 1, 2009:

    Because of the importance of boards of directors, investors

    increasingly care about how directors are appointed, and what their

    background is. This is especially true as American businesses

    increasingly compete in both a global environment, and in a domestic

    marketplace that is, itself, increasingly diverse. In this ever more

    challenging business environment, the ability to draw on a wide

    range of viewpoints, backgrounds, skills, and experience is critical

    to a company's success.

    It should be no surprise that studies indicate that diversity in

    the boardroom can result in real value for companies--and for

    shareholders. It also should be no surprise that many investors--

    from individual investors to sophisticated institutions--have asked

    the Commission to provide for disclosures about the diversity of

    corporate boards and a company's policies related to board

    diversity.

    Also, the SEC issued a rule on Proxy Disclosure Enhancements

    which, among other things, requires public companies to disclose if

    they have a formal policy to consider diversity with respect to

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

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

    4. Conclusion

    Accordingly, after considering the five factors specified in

    Section 15(a) of the CEA, the Commission has determined to propose the

    regulations set forth below. The Commission invites public comment on

    its evaluation of the costs and benefits of all aspects of the

    Governance NPRM.

    List of Subjects

    17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and

    recordkeeping requirements.

    17 CFR Parts 37, 38 and 40

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 39

    Commodity futures, Consumer protection, Reporting and recordkeeping

    requirements.

    For the reasons stated in this release, the Commission proposes to

    amend 17 CFR parts 1, 37, 38, 39, and 40 as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6h, 6i,

    6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a-1,

    16, 16a, 19, 21, 23, and 24 as amended by Pub. L. 222-203, 124 Stat.

    1376.

    2. In Sec. 1.3, as proposed to be amended at 75 FR 63732, October

    18, 2010, 75 FR 65586, October 26, 2010, 75 FR 77576, December 13,

    2010, and 75 FR 80211, December 21, 2010, redesignate paragraphs (zz)

    to (eee) as paragraphs (bbb) to (ggg), redesignate paragraphs (fff) to

    (ggg) as (iii) to (jjj), add and reserve paragraph (zz), and add new

    paragraphs (aaa) and (hhh) to read as follows:

    * * * * *

    (zz) [Reserved].

    (aaa) Affiliate. The term ``affiliate'' means a person that

    directly or indirectly through one or more intermediaries, controls, is

    controlled by, or is under common control with, another person.

    * * * * *

    (hhh) Non-Public Information.

    (1) This term means any information that a registered derivatives

    clearing organization, a designated contract market, or a registered

    swap execution facility owns or any information that such entity

    otherwise deems confidential, such as intellectual property belonging

    to:

    (i) Such registered entity; or

    (ii) A third party, which property such registered entity receives

    on a confidential basis.

    (2) Nothing in this paragraph shall preclude a registered entity

    from adopting a definition of ``non-public information'' that is more

    expansive than the definition in this paragraph.

    * * * * *

    PART 37--SWAP EXECUTION FACILITIES

    3. The authority citation for part 37 continues to read as follows:

    [[Page 734]]

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a as

    amended by Titles VII and VIII of Pub. L. 111-203, 124 Stat. 1376.

    4. Section 37.19, as proposed at 75 FR 63747, October 18, 2010, is

    redesignated as Sec. 37.1201 and amended by adding new paragraph

    (b)(5), redesignating paragraph (d) as paragraph (e), adding new

    paragraph (d), and revising newly designated paragraph (e)(1)

    introductory text, to read as follows:

    Sec. 37.19 Conflicts of Interest.

    * * * * *

    (b) * * *

    (5) Annual Report. The Regulatory Oversight Committee shall prepare

    an annual report assessing, for the Board of Directors and the

    Commission, the regulatory program of the registered swap execution

    facility. Such report shall:

    (i) Describe the self-regulatory program;

    (ii) Set forth the expenses of the regulatory program;

    (iii) Describe the staffing and structure of the same;

    (iv) Catalogue investigations and disciplinary actions taken during

    the year; and

    (v) Review the performance of disciplinary committees and panels,

    as well as the performance of the Chief Compliance Officer (as

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

    * * * * *

    (d) Reporting to the Commission. In the event that the Board of

    Directors of a registered swap execution facility rejects a

    recommendation or supersedes an action of the Regulatory Oversight

    Committee or the Membership or Participation Committee (or entity

    performing the functions of such committee), the registered swap

    execution facility shall submit a written report to the Commission

    detailing:

    (1) The recommendation or action of the Regulatory Oversight

    Committee or the Membership or Participation Committee (or entity

    performing the functions of such committee);

    (2) The rationale for such recommendation or action;

    (3) The rationale of the Board of Directors for rejecting such

    recommendation or superseding such action; and

    (4) The course of action that the Board of Directors decided to

    take contrary to such recommendation or action.

    (e) * * *

    (1) Definitions. For purposes of this Sec. 37.1201(e):

    * * * * *

    PART 38--DESIGNATED CONTRACT MARKETS

    5. The authority citation for part 38 continues to read as follows:

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

    6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21 as amended by

    Pub. L. 111-203, 124 Stat. 1376.

    6. Add Sec. 38.801 to subpart P, as proposed at 75 FR 80612,

    December 22, 2010, to read as follows:

    Sec. 38.801 Governance Fitness Standards.

    (a) General. The designated contract market shall establish and

    enforce appropriate fitness standards for directors, members of any

    disciplinary committee, members of the contract market, and any other

    person with direct access to the facility (including any party

    affiliated with any person described in this paragraph).

    (b) Fitness Standards for Directors and Members of the Disciplinary

    Panel and Disciplinary Committee. Each designated contract market must

    specify and enforce fitness standards for directors, members of any

    Disciplinary Panel (as defined in Sec. 1.3(bbb) of this chapter), and

    members of the Disciplinary Committee (as defined in Sec. 1.63 of this

    chapter). At a minimum, such standards shall include:

    (1) Those bases for refusal to register a person under Section

    8a(2) of the Act; and

    (2) The absence of a significant history of serious disciplinary

    offenses, such as those that would be disqualifying under Sec. 1.63 of

    this chapter.

    (c) Fitness Standards for Members, Persons with Direct Access, and

    Certain Affiliates. Each designated contract market must specify and

    enforce fitness standards for its members and affiliates thereof;

    persons with direct access to the facility; natural persons who,

    directly or indirectly, own greater than ten percent of any one class

    of equity interest in a designated contract market; and parties

    affiliated with the persons enumerated in paragraph (b) of this

    section. At a minimum, such standards shall include those bases for

    refusal to register a person under Section 8a(2) of the Act.

    (d) Verification. Each designated contract market must collect and

    verify information that supports compliance with the standards in

    paragraphs (b) and (c) of this section and provide that information to

    the Commission on an annual basis. Such information may take the form

    of a certification based on verifiable information, an affidavit from

    the general counsel of the designated contract market, registration

    information, or other substantiating information.

    (e) Jurisdiction. As a condition of access, members and non-member

    market participants must agree to become subject to the jurisdiction of

    the designated contract market.

    7. In Sec. 38.851, as proposed at 75 FR 80612, December 22, 2010,

    add new paragraph (b)(5) redesignate paragraph (d) as paragraph (e),

    add new paragraph (d), and revise newly designated paragraph (e)(1)

    introductory text, to read as follows:

    Sec. 38.851 Conflicts of Interest.

    * * * * *

    (b) * * *

    (5) Annual Report. The Regulatory Oversight Committee shall prepare

    an annual report assessing, for the Board of Directors and the

    Commission, the regulatory program of the designated contract market.

    Such report shall:

    (i) Describe the self-regulatory program;

    (ii) Set forth the expenses of the regulatory program;

    (iii) Describe the staffing and structure of the same;

    (iv) Catalogue investigations and disciplinary actions taken during

    the year; and

    (v) Review the performance of disciplinary committees and panels.

    * * * * *

    (d) Reporting to the Commission. In the event that the Board of

    Directors of a designated contract market rejects a recommendation or

    supersedes an action of the Regulatory Oversight Committee or the

    Membership or Participation Committee (or entity performing the

    functions of such committee), the designated contract market shall

    submit a written report to the Commission detailing:

    (1) The recommendation or action of the Regulatory Oversight

    Committee or the Membership or Participation Committee (or entity

    performing the functions of such committee);

    (2) The rationale for such recommendation or action;

    (3) The rationale of the Board of Directors for rejecting such

    recommendation or superseding such action; and

    (4) The course of action that the Board of Directors decided to

    take contrary to such recommendation or action.

    (e) * * *

    (1) Definitions. For purposes of this Sec. 38.851(e):

    * * * * *

    8. Add Sec. 38.901 to subpart R, as proposed at 75 FR 80612,

    December 22, 2010, to read as follows:

    [[Page 735]]

    Sec. 38.901 Composition of governing boards of contract markets.

    (a) General. The governance arrangements of each designated

    contract market shall be designed to permit consideration of the views

    of market participants.

    (b) Notice. Each designated contract market shall design and

    institute a process for considering the range of opinions that market

    participants hold with respect to:

    (1) The functioning of an existing market (including governance

    arrangements) and

    (2) New rules or rule amendments.

    (c) Transparency. As part of its compliance with Sec. 40.9(d) of

    this chapter, each designated contract market shall make available to

    the public and to the relevant authorities, including the Commission, a

    description of such process.

    (1) Such description shall include, at a minimum:

    (i) The manner in which the designated contract market obtains

    opinions from market participants;

    (ii) The manner in which the designated contract market considers

    such opinions; and

    (iii) A summary of the lines of responsibility and accountability

    for considering such opinions, from the relevant operational unit to

    the Board of Directors (and any committee thereof).

    (2) Nothing in paragraph (c) of this section shall be construed to

    constrain the Commission from requiring the designated contract market

    to describe any other element of its process for obtaining a fair

    understanding of the opinions of market participants.

    9. Add Sec. 38.1151 to subpart W, as proposed at 75 FR 80612,

    December 22, 2010, to read as follows:

    Sec. 38.1151 Diversity of Board of Directors.

    (a) General. A designated contract market, if publicly-listed on a

    domestic exchange, shall endeavor to recruit individuals to serve on

    its Board of Directors and its other decision-making bodies (as

    determined by the Commission) from among, and to have the composition

    of the bodies reflect, a broad and culturally diverse pool of qualified

    candidates.

    (b) Standards. Each such designated contract market shall

    formulate, describe, and enforce the standards by which its Board of

    Directors shall be deemed broadly and culturally diverse.

    (c) Transparency. As part of its compliance with Sec. 40.9(d) of

    this chapter, each such designated contract market shall make available

    to the public and to the relevant authorities, including the

    Commission, such standards.

    (d) Annual Certification. (1) On an annual basis, each such

    designated contract market shall certify to the Secretary of Commission

    whether and how its Board of Directors has met such standards. If the

    designated contract market determines that its Board of Directors has

    failed to meet such standards, then the designated contract market must

    describe the manner in which its Nominating Committee is endeavoring to

    structure recruitment to meet such standards.

    (2) Such certification shall be in the form of a letter or an

    affidavit signed by the general counsel of the designated contract

    market.

    PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    10. Revise the authority citation for part 39 to read as follows:

    Authority: 7 U.S.C. 2, 5, 6, 6d, 7a-1, 7a-2, and 7b as amended

    by Pub. L. 111-123, 124 Stat. 1376.

    11. Amend Sec. 39.13, as proposed at 75 FR 63750, October 18,

    2010, by revising paragraph (g)(3)(i) to read as follows:

    Sec. 39.13 Risk management.

    * * * * *

    (g) * * *

    (3) * * *

    (i) The Risk Management Committee shall be composed of at least

    thirty-five percent Public Directors of a derivatives clearing

    organization and at least ten percent representatives of customers. In

    this context, a ``customer'' means any customer of a clearing member,

    including, without limitation:

    (A) Any ``customer'' or ``commodity customer'' within the meaning

    of Sec. 1.3(k) of this chapter;

    (B) Any ``foreign futures or foreign options customer'' within the

    meaning of Sec. 30.1(c) of this chapter; and

    (C) Any customer entering into a cleared swap (as defined in

    Section 1a(7) of the Act).

    * * * * *

    12. Add Sec. 39.24 to read as follows:

    Sec. 39.24 Governance Fitness Standards.

    (a) Governance Arrangements.

    (1) General.

    (i) Each derivatives clearing organization shall establish

    governance arrangements that are transparent:

    (A) To fulfill public interest requirements; and

    (B) To permit the consideration of the views of owners and

    participants.

    (ii) Each derivatives clearing organization shall establish

    governance arrangements that are well-defined and include a clear

    organizational structure with consistent lines of responsibility and

    effective internal controls.

    (2) Transparency. As part of its compliance with Sec. 40.9(d) of

    this chapter, each derivatives clearing organization shall make

    available to the public and to the relevant authorities, including the

    Commission, a description of the manner in which its governance

    arrangements permit the consideration of the views of its owners,

    whether voting or non-voting, and its participants, including, without

    limitation, clearing members and customers. Such description shall

    include, at a minimum:

    (i) The general method by which the derivatives clearing

    organization learns of (A) the views of owners, other than through

    their exercise of voting power, and (B) the views of participants,

    other than through representation on the Board of Directors or any

    committee of the derivatives clearing organization; and

    (ii) The manner in which the derivatives clearing organization

    considers such views.

    (3) Construction. Nothing in paragraph (a)(2) of this section shall

    be construed to constrain the Commission from requiring the derivatives

    clearing organization to describe any other element of the manner in

    which its governance arrangements permit the consideration of the views

    of its owners and participants.

    (b) Fitness Standards. (1) General. Each derivatives clearing

    organization shall establish and enforce appropriate fitness standards

    for directors, members of any disciplinary committee, members of the

    derivatives clearing organization, any other individual or entity with

    direct access to the settlement or clearing activities of the

    derivatives clearing organization, and any party affiliated with any

    individual or entity described in this paragraph.

    (2) Fitness Standards for Directors and Members of the Disciplinary

    Panel and Disciplinary Committee. Each derivatives clearing

    organization must specify and enforce fitness standards for directors,

    members of any Disciplinary Panel (as defined in Sec. 1.3(bbb) of this

    chapter), and members of the Disciplinary Committee (as defined in

    Sec. 1.63 of this chapter). At a minimum, such standards shall include

    (i) those bases for refusal to register a person under Section 8a(2) of

    the Act, and (ii) the absence of a significant history of serious

    disciplinary offenses, such as those that would be disqualifying under

    Sec. 1.63 of this chapter.

    (3) Fitness Standards for Clearing Members, Persons with Direct

    Access, and Certain Affiliates. Each derivatives clearing organization

    must specify and enforce fitness standards for its clearing

    [[Page 736]]

    members and affiliates thereof; persons with direct access to its

    settlement and clearing activities; natural persons who, directly or

    indirectly, own greater than ten percent of any one class of equity

    interest in the derivatives clearing organization; and parties

    affiliated with the persons enumerated in paragraph (b)(2) of this

    section. At a minimum, such standards shall include those bases for

    refusal to register a person under Section 8a(2) of the Act.

    (4) Verification. Each derivatives clearing organization must

    collect and verify information that supports compliance with the

    standards in paragraphs (b)(2) and (3) of this section, and provide

    that information to the Commission on an annual basis. Such information

    may take the form of a certification based on verifiable information,

    an affidavit from the general counsel of the derivatives clearing

    organization, registration information, or other substantiating

    information.

    (5) Jurisdiction. As a condition of access, clearing members and

    other persons with direct access to the settlement and clearing

    activities of a derivatives clearing organization must agree to become

    subject to the jurisdiction of the derivatives clearing organization.

    13. In Sec. 39.25, as proposed at 75 FR 63750, October 18, 2010,

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

    revise newly designated paragraph (c)(1) introductory text to read as

    follows:

    Sec. 39.25 Conflicts of interest.

    * * * * *

    (b) Reporting to the Commission. In the event that:

    (1) The Board of Directors of a derivatives clearing organization

    rejects a recommendation or supersedes an action of the Risk Management

    Committee, or

    (2) The Risk Management Committee rejects a recommendation or

    supersedes an action of its subcommittee (as described in Sec.

    39.13(g)(5) of this part), the derivatives clearing organization shall

    submit a written report to the Commission detailing:

    (i) The recommendation or action of the Risk Management Committee

    (or subcommittee thereof);

    (ii) The rationale for such recommendation or action;

    (iii) The rationale of the Board of Directors (or the Risk

    Management Committee, if applicable) for rejecting such recommendation

    or superseding such action; and

    (iv) The course of action that the Board of Directors (or the Risk

    Management Committee, if applicable) decided to take contrary to such

    recommendation or action.

    (c) * * *

    (1) Definitions. For purposes of this Sec. 39.25(c):

    * * * * *

    14. Add Sec. 39.26 to read as follows:

    Sec. 39.26 Composition of Governing Boards.

    (a) General. (1) Each derivatives clearing organization shall

    ensure that the composition of the governing board or committee of the

    derivatives clearing organization includes market participants.

    (2) Nothing in this section shall supersede any other section of

    this part or any requirement applicable to a derivatives clearing

    organization under Sec. 40.9 of this chapter.

    (b) Composition Requirement. The Board of Directors of a

    derivatives clearing organization shall be composed of at least ten

    percent representatives of customers. In this context, a ``customer''

    means any customer of a clearing member, including, without limitation:

    (1) Any ``customer'' or ``commodity customer'' within the meaning

    of Sec. 1.3(k) of this chapter;

    (2) Any ``foreign futures or foreign options customer'' within the

    meaning of Sec. 30.1(c) of this chapter; or

    (3) Any customer entering into a cleared swap (as defined in

    Section 1a(7) of the Act).

    PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

    15. Revise the authority citation for part 40 to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8, and 12a, as amended

    by Pub. L. 111-203, 124 Stat. 1376.

    16. Revise the heading and add new paragraphs (b)(1)(iii), (d),

    (e), and (f) to Sec. 40.9 as proposed at 75 FR 63751, October 18,

    2010, to read as follows:

    Sec. 40.9 Governance and conflicts of interest.

    * * * * *

    (b) * * *

    (1) * * *

    (iii) Each registered entity referenced in paragraph (b)(1)(i) of

    the section must submit to the Commission, within thirty days after

    each election of its Board of Directors:

    (A) A list of all members of the Board of Directors, each committee

    with a composition requirement (including any Executive Committee), and

    each other committee that has the authority to amend or constrain

    actions of the Board of Directors;

    (B) A description of the relationship, if any, between such

    directors and the registered entity or the members of the registered

    entity (and, in each case, any affiliates thereof, as Sec. 1.3(aaa) of

    defines such term); and

    (C) The basis for any determination that a director qualifies as a

    Public Director, and, for derivatives clearing organizations only, the

    basis for any determination that a director qualifies as a

    representative of customers; and

    (D) A description of how the composition of the Board of Directors

    and each of the committees allows the registered entity to comply with

    applicable core principles, regulations, as well as the rules of the

    registered entity.

    * * * * *

    (d) Transparency of Governance Arrangements. (1) Each registered

    derivatives clearing organization, designated contract market, or

    registered swap execution facility shall, at a minimum, make the

    following information available to the public and relevant authorities,

    including the Commission:

    (i) The charter (or mission statement) of the registered entity;

    (ii) The charter (or mission statement) of the registered entity's

    Board of Directors, each committee with a composition requirement

    (including any Executive Committee), as well as each other committee

    that has the authority to amend or constrain actions of the Board of

    Directors;

    (iii) The Board of Directors nomination process for the registered

    entity, as well as the process for assigning members of the Board of

    Directors or other persons to any committee referenced in paragraph

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

    (iv) For the Board of Directors and each committee referenced in

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

    (v) The identities of: all Public Directors; and with respect to a

    registered derivatives clearing organization, all representatives of

    customers;

    (vi) The lines of responsibility and accountability for each

    operational unit of the registered entity;

    (vii) Summaries of significant decisions implicating the public

    interest. Such significant decisions shall include:

    (A) With respect to a designated contract market or a registered

    swap execution facility, all decisions relating to access, membership,

    and disciplinary procedures; and

    (B) With respect to a derivatives clearing organization, all

    decisions relating to open access (as described in

    [[Page 737]]

    Section 2(h)(1)(B) of the Act), membership (as described in Section

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

    not acceptable for clearing. In describing such decisions, the

    derivatives clearing organization shall specifically disclose whether:

    (1) Its Board of Directors has rejected a recommendation or

    superseded an action of the Risk Management Committee; or

    (2) The Risk Management Committee has rejected a recommendation or

    superseded an action of its subcommittee (as described in Sec.

    39.13(g)(5) of this part).

    (C) Nothing in the foregoing shall be construed as requiring a

    designated contract market, a registered swap execution facility, or a

    derivatives clearing organization to disclose any ``non-public

    information'' (as Sec. 1.3(ggg) of this chapter defines such term),

    including, without limitation, minutes from meetings of its Board of

    Directors or committees and information that it may have received on a

    confidential basis from an applicant for membership.

    (2) The registered entity must ensure that the information

    specified in paragraphs (d)(1)(i) to (vii) of this section is current,

    accurate, clear, and readily accessible, for example, on its Web site.

    The registered entity shall set forth such information in a language

    commonly used in the commodity futures and swap markets and at least

    one of the domestic language(s) of the jurisdiction in which the

    registered entity is located.

    (e) Regulatory Program. (1) As part of its regulatory program, each

    registered derivatives clearing organization, designated contract

    market, or registered swap execution facility must establish, maintain,

    and enforce written procedures to:

    (i) Identify, on an ongoing basis, existing and potential conflicts

    of interest; and

    (ii) Make fair and non-biased decisions in the event of a conflict

    of interest. Such procedures shall include rules regarding the recusal,

    in applicable circumstances, of parties involved in the making of

    decisions. The Chief Compliance Officer of a registered derivatives

    clearing organization or registered swap execution facility shall, in

    consultation with the Board of Directors of the entity, an equivalent

    body, or a senior officer of the entity, resolve any such conflicts of

    interest.

    (f) Limitations on Use or Disclosure of Non-Public Information. (1)

    Each registered entity must establish and maintain written policies and

    procedures on safeguarding non-public information gained through either

    an ownership interest or through the performance of official duties

    (including duties associated with self-regulatory or regulatory

    purposes) by members of its Board of Directors, members of any

    committee, or officers and other employees.

    (2) Such policies and procedures shall comport, at a minimum, with

    the following principles:

    (i) No individual or entity described in paragraph (f)(1) of this

    section shall use or disclose any non-public information, absent prior

    written consent from the relevant registered entity. A registered

    entity shall establish guidelines that specify the information that

    must be included in the written consent.

    (ii) No individual or entity described in paragraph (f)(1) of this

    section shall, either during or after service with the relevant

    registered entity:

    (A) Use, directly or indirectly, information that the registered

    entity deems to be non-public information; or

    (B) Disclose non-public information to others, except:

    (1) To others within the relevant registered entity or to outside

    advisors thereof, provided that such advisors are subject to

    confidentiality obligations, and that such disclosure is necessary for

    the performance of official duties by the individual or entity;

    (2) If required by regulatory authority; or

    (3) If compelled to so by valid legal process, provided that the

    individual or entity notifies the relevant registered entity.

    Issued in Washington, DC, on December 9, 2010, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendices to Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities; Additional Requirements Regarding the Mitigation of

    Conflicts of Interest--Commission Voting Summary and Statements of

    Commissioners

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative; no

    Commissioners voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule on further governance and conflicts

    of interest requirements for derivatives clearing organizations

    (DCOs), designated contract markets (DCMs) and swap execution

    facilities (SEFs). The proposed rule complements the conflicts of

    interest provisions that the Commission proposed on October 1st by

    keeping regulators up to date about the composition of boards, board

    committees and ownership, promoting transparency in decision-making

    and ensuring limitations on use or disclosure of non-public

    information. The proposed rule also provides guidance to industry

    and the public on appropriate minimum governance fitness standards

    for DCOs and DCMs, as well as the manner in which market

    participants must be heard or included in DCO or DCM governance

    arrangements. The proposed rule would enhance the integrity of

    clearing and trading and would increase public trust in the

    facilities on which such important activities occur.

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

    BILLING CODE 6351-01-P

    Last Updated: January 6, 2011



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