Statement on Proposal to Enhance Clearing Agency Governance

Today, the Commission voted to propose rules to strengthen the governance of registered clearing agencies, also known as clearinghouses. This proposal would, among other things, fulfill Section 765 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, where Congress directed the Commission to address conflicts of interest for security-based swap clearinghouses. I was pleased to support this proposal because, if adopted, it would enhance governance standards for all registered clearinghouses, particularly with regards to conflicts of interest. This would help to promote their transparency, resilience, and reliability.

Registered clearinghouses play a vital role in our capital markets. They facilitate what one might call the market plumbing, the several day-process during which cash and securities in a transaction change hands. Standing between buyers and sellers involved in securities transactions, registered clearinghouses help to ensure that such transactions are carried out promptly and accurately.

Registered clearinghouses help to reduce risks in our capital markets. Thus, it is important that they work optimally.

In the reforms after the financial crisis, Congress recognized the importance of addressing conflicts of interest for security-based swaps clearinghouses. In addressing this matter, the staff has recommended we take such a step for all registered clearinghouses—enhancing their governance standards particularly with regards to mitigating conflicts of interest.

Furthermore, the rule proposal would build on the rules that the Commission adopted in 2012 to implement general governance requirements for registered clearinghouses, and in 2016 to heighten those standards for a subset of clearinghouses called covered clearinghouses. Since adopting these rules, and as part of our ongoing oversight of registered clearinghouses, the Commission has observed various needs to enhance these clearinghouses’ governance.

Today’s rules would enhance clearinghouse governance standards to achieve two important goals: promote board independence and reduce the potential for conflicts of interest with respect to the board and senior management.

These rules would require registered clearinghouses to:

• Establish policies and procedures regarding conflicts of interest. This includes requirements that obligate board members to report potential conflicts, if and when they arise. Separately, it also requires clearinghouses to design and implement procedures to identify and then mitigate or eliminate conflicts;
• Implement policies and procedures that promote the consideration of the views of owners, participants, and other relevant stakeholders in the clearinghouse’s governance;
• Follow certain standards for the function, composition, and membership of the clearinghouse’s nominating committee and risk management committee; and
• Structure board composition so that the majority of directors are independent, in that they do not have material relationships or conflicts of interest.

Furthermore, these rules also require registered clearinghouses to develop policies and procedures for the board to oversee the clearinghouse’s relationship with certain critical service providers.

Service providers to registered clearinghouses may include technology vendors and vendors that provide risk management support and help facilitate the clearing agency’s operations. Some service providers provide critical functions to clearinghouses, and therefore present operational risk to those clearinghouses. I think that registered clearinghouses should have policies and procedures describing how the board will monitor such risks from arrangements with critical service providers. Today’s rules would introduce governance standards that require registered clearinghouse boards to do so.

I think these rules would help to build more transparent and reliable clearinghouses. This in turn would help ensure our markets are more resilient, protecting investors and building trust in our markets.

I’d like to thank the SEC staff for their diligent work on these rules, including:

• Haoxiang Zhu, Andrea Orr, David Saltiel, Jeff Mooney, Matt Lee, Stephanie Park, Claire Noakes, Tanin Kazemi, Roni Bergoffen, Sharon Park, Yue Ding, Meredith Macvicar, Heidi Pilpel, David Liu, Nina Kostyukovsky, Emily Westerberg Russell, Lourdes Gonzalez, Alicia Goldin, and John Fahey from the Division of Trading and Markets;
• Jessica Wachter, Lauren Moore, Juan Echeverri, Andrew Glickman, Joshua Mallett, and Jill Henderson from the Division of Economic and Risk Analysis;
• Dan Berkovitz, Meredith Mitchell, Malou Huth, Robert Teply, Donna Chambers, Ronesha Butler, and Dominick Freda from the Office of the General Counsel;
• Carrie O’Brien, Anthony Young, and Stephanie Reinhart from the Division of Examinations;
• Felicia Kung and Daniel Morris from the Division of Corporation Finance; and
• Adal Bolter and Lauren Powell from the Division of Investment Management.