Swap Entities Regulation - Conflicts of Interest, Governance Standards - Comment Letters

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Dodd-Frank Timeline, DCO,DCM,SEF Conflicts of Interest Mitigation
Proposal Date Comment Deadline Final Rule Proposal
October 18, 2010 June 3, 2011 First Qtr. 2012
Dodd-Frank Timeline, DCO,DCM, SEF Governance Standards, Additional Requirements
Proposal Date Comment Deadline Final Rule Issue
January 6, 2011 June 3, 2011 TBA

DCO,DCM,SEF Governance Standards - Conflicts of Interest

LCH.Clearnet - November 5, 2010

DCO, DCM, SEF Governance Standards
November 5, 2010

From the comment letter:

"LCH.Clearnet is fully supportive of the Commission’s proposed requirement that a DCO has a Risk Management Committee responsible for advising the Board on significant changes to the DCO’s risk model and default procedures... [however,] LCH.Clearnet Group believes that it is of paramount importance that the Senior Executive of DCOs be responsible and accountable for risk decisions [and] that the Boards of DCOs should include Public Directors... LCH.Clearnet also believes that the Commission is correct in recommending that a limitation on voting interests is itself sufficient to ensure that conflicts of interests can be sensibly addressed."

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Deutsche Bank - November 8, 2010

DCO, DCM, SEF Governance Standards
November 8, 2010

From the comment letter:

"Deutsche Bank is concerned that the ownership and voting limitations relating to clearinghouses and trading platforms as proposed by the Commissions would have the unintended effects of increasing, rather than decreasing, systemic risk and stymieing, rather than promoting, competition among these institutions. In particular, Deutsche Bank is concerned that the proposed governance provisions relating to the risk management committees of clearinghouses would inappropriately separate the decision-makers on risk decisions from those in the best position to make such decisions. Similarly, the individual ownership and voting limitation relating to SEFs and SB SEFs will remove members’ economic incentives to contribute significant capital and expertise to these facilities."

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Eurex Clearing - November 11, 2010

DCO, DCM, SEF Governance Standards
November 11, 2010

From the comment letter:

Eurex Clearing comments that "risk management committees should be balanced to include approximately equal numbers of clearing members, customers and independent industry experts. Eurex Clearing respectfully suggests that the proposed rules be revised to limit the risk management committee's role to an advisory one, to revise the composition to balance independent, customer and clearing member representation and to require such a risk management committee to report conflicts with the management to the Board of Directors."

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Securities Industry and Financial Markets Association - November 12, 2010

DCO, DCM, SEF Governance Standards
November 12, 2010

From the comment letter:

SIFMA expresses its concern that "the Commissions’ proposals would have the unfortunate effect of limiting the availability to DCOs and Clearing Agencies of capital and expertise and limit competition in the market for clearing services. [They] believe that any concerns about conflicts of interest can be addressed through the core principles for DCOs and statutory requirements applicable to Clearing Agencies. If the Commissions determine it is necessary and appropriate to impose limits on DCO and Clearing Agency ownership by swap dealers and other enumerated entities, those limits should be substantially higher than the proposed 5% limit and there should be no aggregate limit on ownership by swap dealers and other enumerated entities."

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MarketAxess - November 15, 2010

DCO, DCM, SEF Governance Standards
November 15, 2010

"MarketAxess agrees with the Commission and "believes the 20% ownership and voting thresholds will achieve the Commission's goal of preventing a single member from 'dominating the decision-making process' of the SEF while still enhancing competition in this area.' MarketAxess "believes that the Commission's proposed rules will mitigate appropriately conflicts of interest in SEFs without stifling the fundamental commercial interests that lie at the heart of these new registered entities."

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BlackRock - November 15, 2010

DCO, DCM, SEF Governance Standards
November 15, 2010

In regard to the role that Public Directors play, BlackRock believes that "the Commission should ensure that DCOs cannot deny customers and Public Directors a meaningful voice by delegating its functions to subcommittees." They also argue that "buy-side participants (investors and managers) should be guaranteed a meaningful voice in all activities of the Risk Management Committee and urge the Commission to adopt a mechanism to guarantee buy-side participants real input on governance committees, including DCO Risk Management Committees. The Commission should make certain that clearing members cannot change DCO policies and procedures without support from either customers or Public Directors." To ensure this, they propose two options:

  • The Commission could provide for additional customer representation on the Risk Management Committee to guarantee that customers and Public Directors constitute a majority of the Risk Management Committee.
  • The Commission could require the Committee to act by a super-majority vote of no less than 60%.
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NYSE Liffe US - November 16, 2010

DCO, DCM, SEF Governance Standards
November 16, 2010

From the comment letter:

NYSE Liffe US argues that "that potential conflicts of interest are most effectively addressed through the implementation and enforcement of rules and strong governance structures, rather than through arbitrary ownership limitations." NYSE Liffe believes that subjecting DCMs, DCOs and SEFs to a consistent set of acceptable practices "would mitigate conflicts of interest." "Setting forth a common set of requirements that address sources of potential conflicts, such as objective and transparent membership standards, access requirements, disciplinary standards and risk management protocols would help prevent conflicts from interfering with the achievement of regulatory objectives."

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International Swaps and Derivatives Association, Inc. - November 16, 2010

DCO, DCM, SEF Governance Standards
November 16, 2010

From the comment letter:

ISDA is concerned that "the proposed ownership and voting limitations for DCMs, SEFs or DCOs will have the perverse effect of slowing and weakening the very market developments that the Dodd-Frank Act is intended to achieve." They argue that "given the presence of a chief compliance officer at each SEF, given that SEFs may initially operate on a small-scale basis as the market adjusts to their presence, and given the need to encourage the growth and viability of SEFs, it would be preferable for the bureaucracies of SEFs to be as streamlined as possible." In regard to DCOs, "requiring the presence of an unduly large proportion of public directors on the Board of a DCO, who do not represent a party at risk, would be unfair to the member firms of the DCOs and could pose an impediment to the legislative goal of encouraging the clearing of swap contracts." They urge that "no more than 25 percent of a DCO Board of Directors be made up of public directors" and suggest the same for DCMs.

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North American Derivatives Exchange, Inc. - November 16, 2010

DCO, DCM, SEF Governance Standards
November 16, 2010

From the comment letter:

Nadex explains that "the Commission and the industry have had great success- with respect to both safety and transparency in its markets and innovation and competition- with a flexible approach to governance issues, allowing registrants to pursue governance practices and procedures that appropriately mitigate risks given the context of the markets they serve. The Commission should continue with a flexible approach and avoid strict limits that risk damaging the competitiveness of our markets in the United States and the ability of market participants – including DCMs, DCOs, intermediaries and customers – to access markets abroad."

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Tradeweb Markets - November 17, 2010

DCO, DCM, SEF Governance Standards
November 17, 2010

From the comment letter:

Tradeweb suggests "that the goal of mitigating conflicts of interest can be achieved by requiring SEF boards to have a specific, and yet sufficient, number of public directors on its board, particularly when the independent voice of such directors is strengthened with control over a significant percentage of the voting power of the board, which Tradeweb believes is 20%... Tradeweb believes that separating the approach to voting power and voice of the public directors in this way would create a stronger independent presence on SEF boards by focusing on adding a sufficient number of quality public directors and providing them with a real presence in decision-making, rather than simply mandating the presence of more public directors on SEF boards."

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GFI Securities - November 17, 2010

DCO, DCM, SEF Governance Standards
November 17, 2010

From the comment letter:

GFI requests that the Commission "confirm that the term 'member' as used in proposed Regulation 37.19 is intended to refer only to persons who execute transactions directly on a SEF, and does not refer to persons who may be designated as 'members' of the SEF under state limited liability company statutes but who do not themselves effect transactions on the SEF... If the Commission elects not to interpret its proposed SEF ownership restrictions in these manners, market participants may be forced to operate two separate SEFs as a way of minimizing the adverse effects of the Commission's proposal. This, in turn, may discourage competition in the marketplace for swap executive facilities by subjecting market participants that operate SEFs and security-based SEFs to duplicate expenses and regulatory requirements."

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Newedge USA - November 17, 2010

DCO, DCM, SEF Governance Standards
November 17, 2010

From the comment letter:

Newedge USA believes "that many of the 'high bar to entry provisions' that have been proposed with respect to DCO member eligibility are nothing more than thinly veiled attempts by entities with vested interests in the swaps market to protect their existing franchises. However, protecting these vested interests provides no justification for DCOs to enact exclusionary membership requirements that cannot be reasonably justified, particularly when there are viable alternatives that will better protect DCOs and be less exclusionary."

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JP Morgan Chase - November 17, 2010

DCO, DCM, SEF Governance Standards
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
November 17, 2010

From the comment letter:

JP Morgan Chase argues "that no institution, including clearing members and clearing houses should be too big to fail. The policy objectives of the Wall Street Reform and Consumer Protection Act would be well served by promoting systemic stability and ensuring safety and soundness of exchanges, SEFs and clearing houses, and by requiring that these institutions have adequate capital to absorb losses and sufficient liquidity to safeguard the system."

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Futures Industry Association - November 17, 2010

DCO, DCM, SEF Governance Standards
November 17, 2010

From the comment letter:

FIA believes "that the Commissions' proposed ownership restrictions would, if implemented as proposed, be counterproductive because they would likely have the effect of making it far more difficult for new clearinghouses and SEFs to compete with existing institutions... If the Commissions do decide to adopt ownership restrictions, FIA would urge the Commissions to eliminate altogether the aggregate limits on the ownership interests that may be held by the members of a clearinghouse and enumerated entities." FIA further argues that "allowing a clearinghouse to constitute a Risk Management Subcommittee that has an appropriately qualified public representative is a reasoned and appropriate compromise [that] would balance the Commission's objectives with the need for sound and experience management of the risk functions of a clearinghouse."

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Morgan Stanley - November 17, 2010

DCO, DCM, SEF Governance Standards
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
November 17, 2010

Morgan Stanley expresses their concern that "without certain revisions, the Proposals could inadvertently reduce market competitiveness and impair the ability of these entities appropriately to manage their risks. In particular, the proposed 40 percent aggregate equity ownership limitations on clearinghouses should be eliminated in order to foster a vibrant and competitive market... In addition, Morgan Stanley recommends that the Commissions eliminate the requirements that DCO's and SB SCAs' (security-based swap clearing agencies') risk management committees include public or independent directors, and that the independent director requirement for boards of directors as a whole should not be increased above 35 percent."

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Bloomberg - November 17, 2010

DCO, DCM, SEF Governance Standards
November 17, 2010

Bloomberg acknowledges that the CFTC has appropriately identified key variables in "identifying conflicts of interest and generally proposes appropriate measures to improve the governance of SEFs." However, they suggest that "the rule proposals should include a degree of flexibility and discretion in imposing governance requirements on SEFs depending on their ownership structure and other relevant facts and circumstances so that any conflicts of interest requirements are applied meaningfully and appropriately."

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Goldman Sachs - November 18, 2010

DCO, DCM, SEF Governance Standards
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
November 18, 2010

With reference to the composition of DCO and SBSCA Risk Management Committees, Goldman Sachs believes these rules would "undermine the ability of the Commissions to achieve the systemic risk reduction objectives of Dodd-Frank. Further, [they] do not believe that potential conflicts of interest necessitate the imposition of limits on the ownership of DCOs and SBSCAs by member firms. However, to the extent that such limitations are imposed, [they] support the approach set forth in the Proposals which allows DCOs and SBSCAs to choose an alternative that does not involve an aggregate ownership cap across members so that DCOs and SBSCAs have the ability to pursue the model that has been effective in supporting the Dodd-Frank's risk reduction objectives- the utility model."

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Consortium of Major Financial Institutions - December 3, 2010

DCO, DCM, SEF Governance Standards
December 3, 2010

This letter was submitted on behalf of:

  • Bank of America Merrill Lynch
  • Barclays Capital
  • BNP Paribas
  • Citi
  • Credit Agricole Corporate and Investment Bank
  • Credit Suisse Securities (USA)
  • Deutsche Bank AG
  • HSBC
  • Morgan Stanley
  • Nomura Securities International, Inc.
  • PNC Bank, National Association
  • UBS Securities LLC
  • Wells Fargo & Company

From the comment letter:

In undertaking the reviews and determinations, "the Firms" urge the Commissions to bear in mind that the most effective, front-line protection against undesirable market practices lies in the freedom to compete and innovate – because competition supports alternative choices and innovation enhances those choices.

Substantively, the banks are concerned that the proposed aggregate limit on ownership of a clearinghouse, the proposed individual limit on ownership of an execution facility and the proposed composition requirements for specified board committees (i) could increase systemic risk, (ii) would impair competition among clearinghouses and among exchanges and execution facilities, and (iii) would inhibit the development of new execution facilities. The Proposed Rules would also interfere inappropriately with capital-formation and associated commercial decision-making that does not give rise to potential conflicts with regulatory policy objectives."

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The Options Clearing Corporation - March 7, 2011

DCO, DCM, SEF Governance Standards
March 7, 2011

The OCC expresses their opinion against the Proposed Governance Rules and believes that "there is no justification for the Commission to require substantial chances in OCC's governance structure, which has served OCC and the markets very well. OCC is therefore respectfully requesting that the Commission agree that the OCC should be governed by the conflict of interest rules of the SEC. OCC also encourages the Commission to continue to collaborate with the SEC in enacting rules regarding the structure and governance of clearing organizations."

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CBOE Futures Exchange - March 7, 2011

DCO, DCM, SEF Governance Standards
March 7, 2011

From the comment letter:

CFE proposes that the CFTC should:

  • "clarify that the only non-member market participants that must agree to become subject to the jurisdiction of a DCM are those non-members of a DCM that have the ability to enter orders directly into a DCM's trade matching system for execution"
  • "clarify the types of significant decisions that a DCM must make public and readily accessible"
  • "apply all of the same governance and transparency requirements to SEFs as are to be applied to DCMs"
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Minneapolis Grain Exchange - March 7, 2011

DCO, DCM, SEF Governance Standards
March 7, 2011

From the comment letter:

MGEX argues that "the CFTC should not require a written report whenever the board of directors, or RMC if there is a RMC subcommittee, rejects or supersedes an action... Furthermore, requiring each DCO and DCM to collect and verify compliance with the fitness standards for anyone other than directors, disciplinary panel members and clearing members and then report annually to the Commission is not practical. In addition, "the Exchange recommends that the CFTC narrowly define the term 'direct access.' MGEX suggests that in the context of a combined DCO/DCM, the term should be limited to clearing members and not each individual market participant."

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Kansas City Board of Trade - March 7, 2011

DCO, DCM, SEF Governance Standards
March 7, 2011

KCBT argues that "due to the adequacy of rules and procedures currently in place, we do not see any benefit to certify to the Commission on an annual basis that we are in compliance with the governance fitness standards." In addition, "the requirement of submitting prescriptive, voluminous and detailed information ignores the basic principles of self-regulation and thrusts the Commission into the role of a front line regulator."

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IntercontinentalExchange - March 7, 2011

DCO, DCM, SEF Governance Standards
March 7, 2011

From the comment letter:

ICE reminds the Commission that DCMs and DCOs have operated well under the existing conflict of interest and governance Core Principles and Commission regulations for over a decade.

Accordingly, the Commission should:

  • defer implementing any public disclosure requirement regarding board decisions to supersede Risk Management Committee (“RMC”) decisions, until the Commission has studied the interaction between DCO governing boards and their RMCs
  • allow DCMs to distinguish between traders with intermediated access and direct
  • delete the requirement that a DCO obtain a consent to jurisdiction from persons with direct access to a DCO’s settlement and clearing activities
  • delete the prohibition that legal staff of a swaps execution facility (“SEF”), DCM or DCO may not be designated to address conflict of interest issues.
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