October 1, 2010
I concur in the Commission’s proposal of rules pursuant to Section 726 of the Dodd-Frank Act (the “Act”). However, I have a number of concerns associated with the prescriptiveness of the proposed conflict of interest rules. I believe, given the goals of the Act, it is appropriate to consider more flexible ownership structures and voting rights levels as well as the availability of waivers for derivatives clearing organizations (“DCOs”).
Ownership and Voting Limits on DCOs
A main goal of the Act is to mitigate systemic risk in the U.S. financial system by imposing a mandatory clearing requirement on swaps. Additionally, the business of clearing is serious and financially complex. I am concerned that the proposed rules may not properly consider the effect on mitigation of systemic risk, competition, and capital formation in the DCO space, or afford the Commission with the necessary flexibility to achieve those outcomes. Given that the Commission has yet to consider any new DCO applications under the Act, it is extremely unwise to conduct an experiment with the ownership structure of DCOs.
Second, a stated goal of the Act was to provide all market participants with fair, open, and non-discriminatory access to DCOs. To achieve that end, Congress included Open Access and Participant and Product Eligibility provisions in the Act.1 Each provision addresses and attempts to eliminate the potential for clearing entities to use ownership control to obstruct market participants from gaining access to a DCO. Rather than utilizing the limited and inflexible ownership caps in the proposed rules, I believe that the open access and eligibility provisions will be more effective in achieving the Act’s goals of fair, open, and non-discriminatory access to DCOs.
Third, an overarching goal of the Act is the international harmonization of financial regulation. I believe that it’s especially important for the Commission to harmonize its rules with those of foreign regulators in order to prevent regulatory arbitrage. With that said, the European Commission released (September 15, 2010) a proposal on financial reform which does not place individual or aggregate ownership limits on DCOs under European Union jurisdiction.
For the aforementioned reasons, I am in favor of a more flexible approach to limitations on DCO ownership and voting rights, including the availability of a full waiver for individual and aggregate ownership or voting limits on swap dealers or major swap participants that hold or desire to hold debt or equity positions in DCOs.
I fully support the Commission’s decision to require a registered entity to have its board of directors and certain other committees composed of thirty-five percent (35%) public directors. This standard is consistent with the Commission’s previous core principle 15 for designated contract markets (“DCMs”). The Commission thoroughly vetted this percentage with the public in a recent rulemaking and it concluded that having a board of directors for DCMs composed of thirty-five percent (35%) public directors was neither overly burdensome nor cost prohibitive. Today’s proposed rulemaking also raises the question as to whether it is desirable to expand the existing rule from thirty-five percent (35%) up to fifty-one percent (51%) for DCMs, DCOs, and swap execution facilities. I am interested to know how this proposal would enhance the governance of the existing board structures of certain registered entities, and more specifically, how it would expand the clearing and risk management expertise of a DCO.
I strongly encourage the public to closely analyze the language of each proposed rule and to provide the Commission with constructive and detailed comments on each of them. In particular, I am interested to know (i) what effect the Commission’s proposed rules on voting and ownership limitations will have on competition, raising capital, and managing risk, and (ii) whether or not the open access and eligibility provisions in Sections 2(h)(1)(B) and 5b(c)(2)(c) of the Act would be a more effective method for the Commission to expand access to clearing, rather than placing limits on the voting and ownership of DCOs.
1 Section 2(h)(1)(B) and Section 5b(c)(2)(c) of the Act.
Last Updated: October 1, 2010