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High Stakes: Comments on the Adoption of a Rule Related to Clearing Agency Governance and Conflicts of Interest

Nov. 16, 2023

Clearing agencies play a critical role in our markets. Therefore, sound regulation of clearing agencies should be a priority for the Commission. The approach embodied in the final rule, however, micromanages clearing agency governance in a way that is likely to divert board attention from key issues by focusing it instead on an amorphous set of stakeholders. Accordingly, I dissent.

Properly calibrating clearing agency governance is hard. A number of factors contribute to this challenge, including the unique and critical role that clearing agencies play, the level of market power that some clearing agencies enjoy, the separation of clearing agency ownership and clearing agency membership, the existence of regulatory clearing mandates, and the complex regulatory landscape in which clearing agencies operate. To do their job well, clearing agencies need to seek input from a wide range of interested persons. Rather than working to bolster existing clearing agency processes for soliciting input from relevant market participants, today’s rule micromanages clearing agency boards with a set of inflexible mandates.

This micromanagement occurs in several ways. First, the rule obliges the board of directors to:

establish, implement, maintain, and enforce written policies and procedures reasonably designed to require the board of directors to solicit, consider, and document its consideration of the views of participants and other relevant stakeholders of the registered clearing agency regarding material developments in its risk management and operations on a recurring basis.[1]

Directors have a fiduciary duty to act in the best interest of the clearing agency. As one commenter explained, “the concept of director fiduciary duty . . . is a bedrock principle of corporate governance” and “dictates that directors are fiduciaries of the corporation and as such must act in the best interest of it, including by exercising duties of care and loyalty the corporation.”[2] A requirement that the board formally consider the views of an undefined group of “relevant stakeholders”[3] with respect to material developments in risk management and operations muddies that fiduciary duty. Although the scope of the requirement is narrower than proposed—applicable to “risk management and operations” instead of “governance and operations”—it continues to be ambiguously broad. The term “operations” could cover many topics, which suggests boards will have to consult stakeholders on a whole range of issues.[4]

Second, the rule requires clearing agencies’ nominating committees to take a different set of stakeholders’ interests into account. Specifically, the rule requires clearing agencies’ board nominating committees to institute a process for demonstrating “that the nominating committee considered the views of . . . stakeholders [other than owners, participants, and participants’ customers and clients][5] who may be affected by the decisions of the registered clearing agency, including transfer agents, settlement banks, nostro agents, liquidity providers, technology or other service providers.”[6] Again, the rule seems to be asking the board to look beyond what may be best for the clearing agency.[7] Requiring a board to consider the views of “stakeholders,” whose interests may conflict with those of the clearing agency is problematic. Consider, for example, the need to take account of the view of the clearing agency’s largest incumbent technology provider that the clearing agency should not switch to a cheaper, better provider. Why should a supplier’s preference for retaining the clearing agency as a customer inform the nominating committee? The mandated focus on people affected by the clearing agency’s decisions also will distract the nominating committee from finding the mix of candidates best able to “represent the views of the owners and participants,”[8] another requirement in the final rule.[9]

Third, the rule could hamper the efficacy of board risk management committees by spurring more turnover than is prudent.  Although better than the proposed directive to “reconstitute” the risk management committee regularly, the final rule requires annual re-evaluation of the risk management committee’s membership[10] to “prevent stagnation of the [risk management committee] membership.”[11] While having fresh perspectives on the risk committee is a laudable goal, having expert perspectives on the committee is more important.[12] The Commission’s re-evaluation requirement may have the effect of causing more turnover than is conducive to generating the “risk-based, independent, and informed opinion” that the rule requires the risk management committee be able to provide.[13]

The Commission’s increasingly prescriptive approach to clearing agency governance could interfere with the ability of boards to ensure that clearing agencies function safely and efficiently. Neither the rule nor the adopting release makes a serious attempt to reconcile the new requirements with directors’ fiduciary duties.[14]

Even though I have concerns with this rule, I appreciate the meaningful changes incorporated into the final rule to address commenters’ concerns, particularly around service provider relationship management. More generally, I am grateful for the many talented staff across the Commission who devote themselves daily to fostering clearing agency resilience. Whether it is through writing rules like this one, reviewing clearing agency filings, or examining clearing agencies, and, when necessary bringing enforcement actions, the staff’s commitment to the integrity of our markets is evident in their work.


[1] 17 CFR § 240.17Ad-25(j).

[2] Comment Letter of the Options Clearing Corporation at 11 (Oct. 7, 2022) (“OCC Letter”),

[3] The adopting release states that the proposing release explained that “other relevant stakeholders” “generally would include investors, customers of clearing agency participants, and securities issuers.” Adopting Release at 106 (citing Exchange Act Release No. 95431 (Aug. 8, 2022), 87 FR 51812 at 51838 (Aug. 23, 2022)). The rule text, however, contains no such limitation, and the “generally” leaves open the possibility that the board must consider other relevant stakeholders’ views.

[4] See, e.g., OCC Letter at 15 (explaining that the term “operations” is “overly broad and vague”). See also Comment Letter of DTCC at13 (Oct. 7, 2022), (“[W]e are not sure how to interpret such a broad concept [the proposed “material developments in governance and operations”] through policies and procedures, as we read this term to basically mean anything and everything that the registered clearing agency already addresses through its board and management structures and beyond.”).

[5] With respect to these parties, the rule requires the nominating committee to demonstrate that it “has considered whether a particular nominee would complement the other board members, such that, if elected, the board of directors, taken as a whole, would represent the views of the owners and participants, including a selection of directors that reflects the range of different business strategies, models, and sizes across participants, as well as the range of customers and clients the participants serve.” 17 C.F.R.240.17Ad-25(c)(4)(ii).

[6] 17 CFR § 240.17Ad-25(c)(4)(iii).

[7] One commenter explained the problem this way:

Conceivably, a matter may be in the best interest of [the clearing agency] but not in the best interest of one of the stakeholder groups for which the Board may be required to consider its viewpoints. It is unclear how consideration of the viewpoints of stakeholders in this case could cause a director to alter her view on a matter if she believes, taking into account the viewpoints of stakeholders, that the best interest of [the clearing agency] and viewpoints of stakeholders are not aligned.

OCC Letter at 29 (Oct. 7, 2022).

[8] 17 C.F.R, 240.17Ad-25(c)(4)(ii).

[9] See, e.g., Comment Letter of ISDA at 6 (Nov. 28, 2022) (“ISDA Letter”), (“While we support the SEC’s efforts to diversify the representation on, and increase the independence of, the boards of registered clearing agencies to better represent the views of owners, participants, and the range of customers and clients the participants serve, we urge the SEC not to take an overly prescriptive approach, for instance by including a large number of other stakeholders, which could result in under-representation on a clearing agency’s board of the participants with critical expertise or that would bear substantially all of the losses associated with a failure of such clearing agency.”).

[10] 17 C.F.R, 240.17Ad-25(d)(1).

[11] Adopting Release at 61.

[12] See, e.g., Comment Letter of Intercontinental Exchange at 5 (Nov. 11, 2022), (“Of paramount importance to the value of a risk management committee is the expertise and experience of its members, which is often closely correlated with tenure.”); ISDA Letter at 3 (Nov. 28, 2022), (stating that risk management committee “members should have specific skills and experience that may not be customary to the more general skills and experience required of board members”). This commenter suggested allowing the risk management committee to be an advisory committee so that “its members can focus on providing risk management expertise to the CCP, without being bound or influenced by any duty to the commercial interests of the clearing agency as a board member may be.” Id.

[13] 17 C.F.R, 240.17Ad-25(d)(2).

[14] The adopting release notes that “soliciting and considering stakeholder views relating to operations and risk management helps the board to fulfill its fiduciary duty to the registered clearing agency because it helps the board to collect information from affected stakeholders regarding the clearing agency’s core risk management function.” Adopting Release at 119-120. This somewhat circular statement does little to help boards weigh stakeholder interests against clearing agency interests.

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