Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rules Regarding 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
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
October 13, 2010
Thank you, Chairman Schapiro.
The proposal before us would subject security-based swap clearing agencies, security-based swap execution facilities, and security-based swap exchanges to certain governance requirements and ownership limitations. The proposal reflects the Commission's attempt to mitigate certain conflicts of interest in accordance with Section 765 of the Dodd-Frank Act and is but one of many regulatory steps the Commission is charged with taking in crafting a regulatory regime to oversee the security-based swaps market.
I want to start by crediting the staff for the release's thoughtful exploration of the objectives and tensions at the core of this rulemaking. The release engages the central tradeoffs that are at issue and that, as I see it, ultimately inform the policy judgments that will have to be rendered.
As always, I look forward to considering the comments we will receive. Drawing from the release's discussion, I do want to underscore two sets of questions that I hope commenters will address. The first set asks about the role of independent directors; and the second set of questions queries the potential impact of the proposed ownership limitations.
Independent Directors: First, concerning the role of independent directors, what factors are most likely to influence the behavior of independent directors and in what ways? For example, what incentives do independent directors have if the goal is to maximize profits? Might independent directors afford access to clearing services or expand the scope of clearable products to such an extent that sound risk management is compromised? What are the potential consequences if independent directors lack the requisite expertise to serve effectively as board members? What are the incentives of participant-related directors in comparison? Regarding clearing, how are participant-related directors likely to balance effective risk management with allowing more access and more products to be cleared?
Simply put, whether or not having more independent directors will result in the kind of decision making that advances certain policy objectives is uncertain, and I look forward to hearing commenters' views.
Ownership Limitations: Second, concerning the impact of ownership limitations, what considerations should inform the Commission's evaluation of the proposed ownership caps? To the extent there are meaningful governance requirements - including a meaningful number of independent board members - are ownership limitations also warranted to mitigate conflicts of interest? How, if at all, might the ownership limitations distort the development of the security-based swaps market? For example, might the ownership caps discourage the establishment of new security-based swap clearing agencies, security-based swap execution facilities, and security-based swap exchanges at the expense of competition?
These questions are suggestive of one overarching hesitation I have with the proposal - namely, I am concerned that the proposal will prove to be too prescriptive, mandating governance and ownership constraints that, notwithstanding the best of intentions, will frustrate the development of a competitive security-based swaps market and result in suboptimal risk management. I appreciate the measure of regulatory flexibility that the Commission's exemptive authority can afford. However, instead of deferring to the Commission to tailor the regulation by granting exemptions in appropriate instances, perhaps the regulatory regime should provide for additional governance and ownership flexibility at the outset.
Having said this, I believe that it is important for the Commission to move this rulemaking forward so that the Commission can benefit from the additional information and input we will receive through the notice-and-comment process. Accordingly, I support the recommendation. I do so with caution, mindful of the impact of the agency's action if the Commission does not properly calibrate these reforms.
In conclusion, I want to thank the staff again - particularly those from the Division of Trading and Markets and the Division of Risk, Strategy, and Financial Innovation - for your efforts since Dodd-Frank was enacted. I greatly appreciate both your professionalism and your commitment.