Public Statements & Remarks

Statement of Commissioner Kristin N. Johnson in Support of Proposed Rulemaking to Strengthen DCO Governance

July 27, 2022

I support the Commission’s consideration of the proposed derivatives clearing organization (DCO) governance measures that establish structural and procedural mechanisms designed to improve efforts to identify and mitigate material risks, strengthen DCO resilience, and foster the integrity of our markets.

DCOs provide comprehensive settlement services and take on counterparty risk with the assistance of clearing members to facilitate centralized and over-the-counter trading.   DCOs also stand as final guarantors of performance in the event of a customer and clearing member default.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)[1] introduced groundbreaking reforms that directed the bulk of derivatives trading to DCOs, charging them with the great responsibility of maintaining the integrity of the derivatives markets through comprehensive and prudent risk mitigation practices.  These practices include securely handling participant funds and assets, developing and administering robust forward-looking margining frameworks for idiosyncratic markets, consistently setting appropriate margin levels for trader portfolios, and collecting risk-based guaranty fund contributions from clearing members.  DCO risk mitigation practices thereby can profoundly impact individual firms and, depending on the systemic importance of a specific DCO, the broader financial market.

The proposed rules include recommendations that the Commission received from the Central Counterparty (CCP) Risk and Governance (Subcommittee) of the Market Risk Advisory Committee (MRAC).[2]  I thank Chairman Behnam, who previously served as the sponsor of the MRAC and its subcommittees.  The Subcommittee’s Report is the product of effective collaboration among market participants with divergent views.  The Report reflects the leadership of Chairman Behnam and the Subcommittee Co-Chairs, Alicia Crighton and Lee Betsill, as well as the exceptional stewardship of Alicia Lewis, Special Counsel to the Chairman.  Today, I serve as the MRAC’s sponsor, and intend to continue the work of Chairman Behnam and further the goals outlined in the Committee’s Charter– “promoting the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation, as well as the monitoring and management of systemic risk.”[3]

The proposed rulemaking requires DCOs to standup risk management committees comprised of clearing members and their customers to leverage their risk management expertise and formalize the role of market participants in the DCO governance process pursuant to DCO Core Principles. The proposed rulemaking acknowledges that, at times, the perspectives of DCOs and their clearing members may not be aligned. As privately-owned businesses DCOs balance the interests of their owners and those of clearing members who have strong incentives to mitigate preventable default because DCO clearing members disproportionately bear default costs.  DCOs adopt diverse business organizational forms and may have existing board committees focused on risk management oversight, however, we anticipate that comments to the proposal will articulate the best approach for establishing a clear and uniform process for risk management committees to report concerns on all matters that could materially affect a DCO’s risk profile to the board of directors or appropriate decision-making authority and for ensuring that the decision-making authority effectively considers the reported concerns.

In 2010 and 2011, similar requirements were proposed but not adopted.[4]  DCO Core Principles O (Governance Fitness Standards), P (Conflicts of Interest), and Q (Composition of Governing Boards) collectively address governance requirements related to considering the views of owners and participants, adopting appropriate fitness standards for directors and others, minimizing and resolving conflicts of interest in decision-making, and including market participants on governing boards or committees. DCO Core Principle O expressly directs each DCO to establish governance arrangements that “permit the consideration of the view of owners and participants.”[5] Consequently, today’s proposal rekindles a critical, unresolved effort to reinforce DCO risk governance. 

While I am supportive of the proposal, I stand committed to carefully consider, based on the comments that we receive, the benefits, efficacy, limitations, and burdens of the proposed governance rules. There are certain aspects of the proposal where I particularly believe substantive comments from market participants will tremendously add value to the deliberative process. I am hopeful that the comments submitted in response to the proposal will support drafting final rules that make our markets stronger and safer through regulatory oversight.  I am sensitive to the need to consider how the proposed measures supplement existing risk management oversight and concerns about the need to ensure that the proposed rules effectively accomplish the articulated goals of making our markets safer and more resilient.

With the considerations noted above, I support issuing today’s proposal for comment.  The Dodd-Frank Act prominently entrusts DCOs with maintaining the integrity of the derivatives markets through risk mitigation practices that can profoundly impact individual firms and the broader financial market.  The Dodd-Frank Act amendments to the Commodity Exchange Act also expressly direct each DCO to establish governance arrangements that internalize the views of participants.  I look forward to receiving substantive commentary from all stakeholders to facilitate tailoring governance rules that further enhance a DCO’s ability to prudently manage risk.


[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, tit. VII (July 21, 2010) (codified in relevant part at 7 U.S.C. 7a-1).

[2] See Report of the Central Counterparty (CCP) Risk and Governance Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Feb. 23, 2021) (the “Report”).

[3] MRAC Charter available at

[4] See Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63,732 (Oct. 18, 2010); Governance Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities, Additional Requirements Regarding the Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).

[5] 7 U.S.C. 7a-1(c)(2)(O).