[Federal Register Volume 76, Number 45 (Tuesday, March 8, 2011)]
[Proposed Rules]
[Pages 12645-12648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5183]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 242
[Release No. 34-64018; File No. S7-27-10]
RIN 3235-AK74
Ownership Limitations and Governance Requirements for Security-
Based Swap Clearing Agencies, Security-Based Swap Execution Facilities,
and National Securities Exchanges With Respect to Security-Based Swaps
Under Regulation MC
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; reopening of comment period.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
reopening the period for public comment on proposed Regulation MC under
the Securities Exchange Act of 1934 (``Exchange Act''), which is
designed to mitigate potential conflicts of interest at clearing
agencies that clear security-based swaps (``security-based swap
clearing agencies''), security-based swap execution facilities (``SB
SEFs''), and national securities exchanges that post or make available
for trading security-based swaps (``SBS exchanges''). The proposal was
originally published in Securities Exchange Act Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010) (``Regulation MC
Proposing Release''). The Commission is reopening the period for public
comment to solicit further comment on Regulation MC in light of other
more recent proposed rulemakings that concern conflicts of interest at
security-based swap clearing agencies and SB SEFs.
DATES: Comments should be received on or before April 29, 2011.
[[Page 12646]]
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File No. S7-27-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. S7-27-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Proposals relating to security-based
swap clearing agencies: Catherine Moore, Senior Special Counsel, at
(202) 551-5710; and Joseph P. Kamnik, Special Counsel, at (202) 551-
5710, Office of Clearance and Settlement, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-7010; proposals relating to SB SEFs and SBS
exchanges: Nancy J. Burke-Sanow, Assistant Director, at (202) 551-5620;
Susie Cho, Special Counsel, at (202) 551-5639; Sarah Schandler, Special
Counsel, at (202) 551-7145; Iliana Lundblad, Attorney-Advisor, at (202)
551-5871; and Jasmin Sethi, Attorney-Advisor, at (202) 551-5781, Office
of Market Supervision, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission proposed Regulation MC pursuant to Section 765 of
the Dodd Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act'') to mitigate conflicts of interest with respect to
security-based swap clearing agencies, SB SEFs, and SBS exchanges.\1\
Section 765(a) of the Dodd-Frank Act provides that the Commission shall
adopt rules, which may include numerical limits on the control of, or
the voting rights with respect to, any security-based swap clearing
agency, or on the control of any SB SEF or SBS exchange, by certain
specified entities.\2\ Under Section 765(b) of the Dodd-Frank Act, the
Commission shall adopt such rules if it determines that they are
necessary or appropriate to improve the governance of, or to mitigate
systemic risk, promote competition or mitigate conflicts of interest in
connection with a security-based swap dealer's or major security-based
swap participant's conduct of business with, a security-based swap
clearing agency, SB SEF, or SBS exchange and in which such security-
based swap dealer or major security-based swap participant has a
material debt or equity investment.\3\
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\1\ The President signed the Dodd-Frank Act (Pub. L. 111-203,
H.R. 4173) into law on July 21, 2010.
\2\ See Public Law 111-203, Section 765(a). The entities
specified in Section 765(a) (collectively, ``Specified Entities'')
include a bank holding company with total consolidated assets of $50
billion or more, a nonbank financial company supervised by the Board
of Governors of the Federal Reserve System, an affiliate of such
bank holding company or nonbank financial company, a security-based
swap dealer, a major security-based swap participant, or a person
associated with a security-based swap dealer or a major security-
based swap participant.
\3\ See Public Law 111-203, Section 765(b).
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In the Regulation MC Proposing Release, the Commission identified
conflicts of interest that may arise when a small number of
participants, including participants that are Specified Entities,
exercise undue control or influence over a security-based swap clearing
agency, SB SEF or SBS exchange.\4\ To address these potential conflicts
of interest, and pursuant to Section 765 of the Dodd-Frank Act, the
Commission proposed certain restrictions in Regulation MC with respect
to the ownership and voting interests in and the governance of
security-based swap clearing agencies, SB SEFs and SBS exchanges.
Specifically, the Commission proposed two alternative rules for
security-based swap clearing agencies that would impose different
degrees of voting and governance restrictions on such entities \5\ and
one set of rules that would impose ownership and governance limitations
on SB SEFs and SBS exchanges.\6\
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\4\ Specifically, the Commission noted that these participants,
for competitive or commercial reasons, may have an incentive to
limit access by other participants to security-based swap clearing
agencies, SB SEFs and SBS exchanges; to limit the scope of products
cleared through security-based swap clearing agencies or traded on
SB SEFs and SBS exchanges; to lower the risk management controls at
security-based swap clearing agencies; and to put the commercial
interests of the SB SEF or SBS exchange or the SB SEF's or SBS
exchange's owners ahead of the SB SEF's or SBS exchange's market
oversight responsibilities. See Regulation MC Proposing Release, 75
FR at 65884-65893.
\5\ Proposed Rule 701(a) of Regulation MC sets forth the
``Voting Interest Focus Alternative,'' which would create a
limitation on ownership and voting of voting interests for
participants of a security-based swap clearing agency to no more
than 20% on an individual basis and, in the aggregate, no more than
40% (``aggregate cap''). Proposed Rule 701(a) would also limit
members' participation in the governance of the security-based swap
clearing agency by requiring that at least 35% of the security-based
swap clearing agency's board of directors (`board'') and committees
authorized to act on behalf of such board, including the risk
committee, be composed of independent directors. The nominating
committee of the security-based swap clearing agency's board would
be required to be composed of a majority of independent directors.
See Regulation MC Proposing Release, 75 FR at 65894-65899.
Proposed Rule 701(b) of Regulation MC sets forth the
``Governance Focus Alternative,'' which would create a limitation on
ownership of voting interests for participants of a security-based
swap clearing agency to no more than 5% on an individual basis but
would impose no aggregate cap. Proposed Rule 701(b) would also limit
members' participation in the governance of the security-based swap
clearing agency by requiring that at least a majority of the
security-based swap clearing agency's board and committees
authorized to act for such board, including the risk committee, be
composed of independent directors. The nominating committee of the
security-based swap clearing agency's board would be required to be
composed solely of independent directors. See Regulation MC
Proposing Release, 75 FR at 65899-65903.
\6\ Proposed Rule 702(b) of Regulation MC would impose a 20%
limitation on ownership and voting of voting interests in a SB SEF
or an SBS exchange by each participant of a SB SEF or member of an
SBS exchange. Proposed Rules 702(d) and (g) would require that the
board of a SB SEF or SBS exchange, any executive committee of such
board, and any board committee with the authority to act on behalf
of the board, be composed of a majority of independent directors,
and proposed Rule 702(f) would require the nominating committee of
the board of the SB SEF or SBS exchange to be composed solely of
independent directors. Proposed Rule 702(e) would require the board
of the SB SEF or SBS exchange to establish a regulatory oversight
committee consisting solely of independent directors to oversee the
SB SEF's or SBS exchange's regulatory program. Any recommendation of
the regulatory oversight committee not adopted by the board of the
SB SEF or SBS exchange would be required to be reported promptly to
the Commission. Further, proposed Rule 702(h) would require the
disciplinary processes of the SB SEF or SBS exchange to provide for
compositional balance and to include at least one independent
director. See Regulation MC Proposing Release, 75 FR at 65904-65912.
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In the Regulation MC Proposing Release, the Commission sought
commenters' views with respect to the identified conflicts of interest
and its
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proposed rules that are designed to mitigate those conflicts. The
public comment period for proposed Regulation MC closed on November 26,
2010. As of March 1, 2011, the Commission has received 100 comment
letters relating to proposed Regulation MC.\7\ The Commission also
received 6 comment letters relating to Section 765 of the Dodd-Frank
Act that were received in response to the Commission's general
solicitation of comments regarding implementation of the Dodd-Frank
Act.\8\ These letters were submitted by a broad spectrum of interested
parties and reflect a wide array of views regarding the proposed
limitations on ownership and voting interests and governance
arrangements in proposed Regulation MC.\9\ A number of commenters
generally supported the Commission's efforts to address conflicts of
interest at security-based swap clearing agencies, SB SEFs and SBS
exchanges, and many of these commenters favored imposing more
restrictive ownership and voting, or governance, requirements than were
proposed in Regulation MC.\10\ A number of other commenters opposed
some or all of the proposed restrictions and questioned whether it is
necessary or appropriate for the Commission to adopt rules to mitigate
conflicts of interest under Section 765 or whether the Commission
should adopt rules without conducting a further review.\11\
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\7\ Copies of comments received in response to the Regulation MC
Proposing Release are available on the Commission's Internet Web
site, located at http://www.sec.gov/comments/s7-27-10/s72710.shtml.
\8\ Comments were solicited by the Commission at http://www.sec.gov/spotkight/dodd-frank/clearing-settlement.shtml. Comments
in response to the Commission's general solicitation are available
at http://www.sec.gov/comments/df-title-vii/mandatory-clearing/mandatory-clearing.shtml. There is no expiration to the comment
period for the Commission's general solicitation.
\9\ The commenters included individual investors, end-users,
members of Congress, the U.S. Department of Justice, State
legislators, labor organizations, potential security-based swap
dealers and clearing agencies, and potential SBS exchanges or SB
SEFs. See supra notes 7 and 8.
\10\ See, e.g., Letter from U.S. Congressman Stephen F. Lynch,
9th District, Massachusetts (October 18, 2010); Letter from
Americans for Financial Reform (November 16, 2010); Letter from
Karrie McMillan, General Counsel, Investment Company Institute
(November 17, 2010); Letter from Mike Hisler, Co-Founder, The Swaps
& Derivatives Market Association (November 26, 2010); and Letter
from Christine A. Varney, Assistant Attorney General, U.S.
Department of Justice, Antitrust Division (December 28, 2010).
\11\ See, e.g., Letters from Roger Liddell, Chief Executive,
LCH.Clearnet Group Limited (September 24, 2010 and November 5,
2010); Letter from R. Glenn Hubbard, Co-Chair, John L. Thornton, Co-
Chair, and Hal S. Scott, Director, Committee on Capital Markets
Regulation (November 15, 2010); Letter from James Hill, Managing
Director, Morgan Stanley (November 17, 2010); Letters from Kathleen
M. Cronin, Managing Director, General Counsel and Corporate
Secretary, CME Group Inc. (November 17, 2010 and November 24, 2010);
and Letter from Robert Pickel, Executive Vice Chairman,
International Swaps and Derivatives Association, Inc. (November 23,
2010).
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On February 2, 2011, the Commission proposed an interpretation of
the definition of ``security-based swap execution facility,'' as well
as rules relating to the registration and regulation of SB SEFs.\12\
The SB SEF Proposing Release includes proposals that are designed, in
part, to address conflicts of interest affecting SB SEFs.\13\ The SB
SEF Proposing Release seeks commenters' views regarding the interaction
of proposed Regulation SB SEF with proposed Regulation MC.
Specifically, the SB SEF Proposing Release asks commenters, taking into
account both proposals, to address whether the proposals contained in
proposed Regulation SB SEF would appropriately address conflicts of
interest concerns for SB SEFs or whether they should be revised either
as unnecessary or insufficient to address such conflicts of interest.
The SB SEF Proposing Release also asks commenters to provide their
views on whether there any redundancies or gaps for mitigating
conflicts of interest for SB SEFs that should be addressed.\14\ The
public comment period for proposed Regulation SB SEF expires on April
4, 2011.
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\12\ Securities Exchange Act Release No. 63825 (February 2,
2011), 76 FR 10948 (February 28, 2011) (``SB SEF Proposing
Release'').
\13\ Specifically, proposed Rule 809 of proposed Regulation SB
SEF would require a SB SEF to permit any security-based swap dealer,
major security-based swap participant or broker to become a
participant of the SB SEF as long as specified objective criteria
are met; proposed Rule 811(b) would require a SB SEF to establish
fair, objective, and not unreasonably discriminatory standards for
granting impartial access to trading on the facility, and would
specify that a SB SEF may not unreasonably prohibit or limit any
person with respect to access to the services offered by the SB SEF
by applying those standards in an unfair or unreasonably
discriminatory manner; proposed Rule 811(b) also would require
information on any grants, denials or limitations of access by the
SB SEF to be reported on Form SB SEF (the proposed registration form
for SB SEFs) and in the required annual report of the SB SEF's Chief
Compliance Officer; proposed Rule 811(c) would require a SB SEF to
establish a compositionally balanced swap review committee to
determine the security-based swaps that would trade on the SB SEF,
as well as the security-based swaps that should no longer trade on
the SB SEF; with respect to the determination regarding whether a
particular security-based swap is ``made available to trade,'' that
determination would be made pursuant to objective standards to be
established by the Commission; and proposed Rule 820 would require
that no less than 20% of the total number of directors on the SB
SEF's board be representative of SB SEF participants, and that at
least one director on the SB SEF's board be representative of
investors. See SB SEF Proposing Release, supra note 12.
\14\ See SB SEF Proposing Release, supra note 12, 76 FR at
10986.
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On March 2, 2011, the Commission proposed rules regarding
registration of clearing agencies and standards for the operation and
governance of clearing agencies \15\ in accordance with Sections 763
and 805 of the Dodd-Frank Act \16\ and Section 17A of the Exchange
Act.\17\ Some of those proposed rules are designed, in part, to address
conflicts of interest affecting clearing agencies, including security-
based swap clearing agencies.\18\ In particular, the Clearing Agency
Proposing Release includes proposed rules that would require all
clearing agencies to have policies and procedures to identify and
address existing or potential conflicts of interest and to establish
minimum governance standards for board or board committee members.\19\
In addition, the Clearing Agency Proposing Release includes proposed
rules that would require clearing agencies to provide opportunity for
membership access to persons that are not dealers or security-based
swap dealers and persons that have net capital of at least $50 million,
while also prohibiting the use of minimum portfolio size and minimum
volume transaction thresholds as a condition for membership, in order
to decrease the potential for formal membership requirements to be
applied anti-competitively.\20\ The Clearing Agency Proposing Release
seeks commenters' views regarding the interaction between proposed
Regulation MC and the mitigation of conflicts provisions reflected in
the Clearing Agency Proposing Release. The public comment period for
the Clearing Agency Proposing Release closes on April 29, 2011.
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\15\ Securities Exchange Act Release No. 64017 (March 2, 2011)
(``Clearing Agency Proposing Release'').
\16\ Public Law 111-203, Sections 763 and 805.
\17\ 15 U.S.C. 78q-1.
\18\ Specifically, proposed Rule 17Ad-25 under the Exchange Act
would require that clearing agencies have policies and procedures to
identify and address existing or potential conflicts of interest and
to establish minimum governance standards for board or board
committee members. Proposed Rules 17Ad-22(c)(5) and (c)(7) under the
Exchange Act would require clearing agencies to provide an
opportunity for membership access to persons who are not dealers or
security-based swap dealers and persons who have net capital of at
least $50 million. In addition, Proposed Rule 17Ad-22(c)(6) under
the Exchange Act would prohibit the use of minimum portfolio size
and minimum volume transaction thresholds as a condition for
membership. See Clearing Agency Proposing Release, supra note 15.
\19\ See Clearing Agency Proposing Release, supra note 15.
\20\ See Clearing Agency Proposing Release, supra note 15.
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When the Commission issued the SB SEF Proposing Release and
Clearing
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Agency Proposing Release, it was mindful of its prior proposals under
Regulation MC.\21\ However, the Commission recognizes that commenters
who provided their views and suggestions on proposed Regulation MC did
not have the benefit of considering the proposals in the SB SEF
Proposing Release and the Clearing Agency Proposing Release, which also
seek to address some potential conflicts of interest affecting these
entities, when they submitted their comments.
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\21\ See SB SEF Proposing Release, supra note 12, at notes 82,
97, 127, 128, 134, 139, 141, 147, 172, 208, 269 and 570 and
accompanying text, and 76 FR at 10979 and 10983-10986. See also
Clearing Agency Proposing Release, supra note 15, at notes 45 and
107 and accompanying text.
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The Commission therefore is reopening the comment period to invite
further comment on proposed Regulation MC, particularly in light of the
additional proposals relating to mitigation of conflicts for security-
based swap clearing agencies and SB SEFs that are contained in the
Clearing Agency Proposing Release and SB SEF Proposing Release,
respectively.
II. Request for Comment
Commenters are asked to consider the provisions designed to address
conflicts of interest in the Regulation MC Proposing Release and in the
Clearing Agency Proposing Release and the SB SEF Proposing Release, in
the aggregate, when providing further comment on how the Commission
should address potential conflicts of interest at security-based swap
clearing agencies and SB SEFS, respectively. Are some or all of the
proposed requirements in the SB SEF Proposing Release and the Clearing
Agency Proposing Release and the requirements in the Regulation MC
Proposing Release mutually supportive? Why or why not? Should any of
the proposed requirements discussed in the SB SEF Proposing Release,
the Clearing Agency Proposing Release, or the Regulation MC Proposing
Release relating to conflicts of interest be revised in light of the
proposed requirements relating to conflicts of interests in the other
releases? If so, which requirements should be revised and how? Are the
proposed requirements discussed in the SB SEF Proposing Release, the
Clearing Agency Proposing Release, or the Regulation MC Proposing
Release relating to conflicts of interest, when considered together,
sufficient to mitigate conflicts of interest for SB SEFs, SBS exchanges
or security-based swap clearing agencies, or should the Commission
consider additional, or alternative, measures? Are any of the proposed
requirements discussed in the SB SEF Proposing Release, the Clearing
Agency Proposing Release, or the Regulation MC Proposing Release
relating to conflicts of interest unnecessary in light of proposed
requirements relating to conflicts of interest in the other releases?
Why or why not?
Comments may provide the Commission with further insights regarding
what mechanisms, if any, may be necessary or appropriate to mitigate
conflicts of interest and how the proposed requirements in the three
proposals should be evaluated. Commenters should provide specific
reasons and information to support their views and recommendations,
including an analysis of why a recommendation would satisfy the
statutory mandate contained in Section 765 of the Dodd-Frank Act
regarding mitigation of conflicts of interest. The Commission asks that
commenters, when possible, provide the Commission with empirical data
to support their views.
By the Commission.
Dated: March 3, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-5183 Filed 3-7-11; 8:45 am]
BILLING CODE 8011-01-P