The Commission has adopted a new rule under the Securities Exchange Act of 1934 to establish governance standards for registered clearing agencies. The rule also requires registered clearing agencies to take specified measures to mitigate or eliminate conflicts of interest. Clearing agencies play a central role in the securities markets and – unlike other entities registered with the Commission, such as broker-dealers and investment advisers – are not easily substitutable. Given the broad general support for the rule in the public comments and because the Commission has incorporated various recommendations submitted by commenters, I voted in favor of the final rule.

The adopting release explains that “clear and transparent governance arrangements are integral to ensuring that a clearing agency is resilient…”[1] The challenge is in crafting governance standards that are appropriately designed to achieve the desired outcome without imposing unnecessary costs. The final rule has attempted to address this balance by making four changes from the proposal.

1. Rule 17Ad-25(d)(1), which would have required a clearing agency’s risk management committee to reconstitute its membership on a regular basis, now only requires that committee membership be reevaluated on an annual basis. A requirement to reconstitute could have resulted in the unnecessary removal of risk management committee members with deep industry and subject matter expertise. The requirement to reevaluate permits risk management committees with the flexibility to retain valuable members from year to year while still ensuring that membership adjustments are made when appropriate.

2. The definition of “service provider for core services” set forth in proposed Rule 17Ad-25(a) was overly broad and lacked sufficient clarity.[2] The scope of the final definition has been narrowed by specifying that a service provider is only covered if it: (a) furnishes its services pursuant to a written agreement, (b) provides its services on an ongoing basis, and (c) directly supports the delivery of settlement or clearance functionality or any other purpose material to the business of the registered clearing agency. The adopting release makes clear that this change will eliminate potentially absurd results, such as a public utility company falling within the scope of the rule.

3. Rule 17Ad-25(i), which would have imposed obligations regarding the management of risks from relationships with service providers for core services, has been substantially revised to more clearly delineate the roles of senior management and the board. The proposed rule had the effect of imposing many management responsibilities directly on the board of a registered clearing agency. The final rule appropriately clarifies that the board’s function is one of oversight, not direct management.

4. Rule 17Ad-25(j) initially would have required the boards of registered clearing agencies to solicit and consider viewpoints of participants and other relevant stakeholders regarding material developments in the clearing agency’s governance and operations. The final rule narrows the scope of this requirement to developments in the clearing agency’s risk management and operations.

In addition to these substantive changes, the Commission has extended the proposed compliance date for the majority of the rule’s provisions from 180 days after publication in the Federal Register to 12 months after publication in the Federal Register. A 180-day compliance period would have required registered clearing agencies to develop mechanisms to comply with this rule at about the same time that they are preparing for the important transition to a T+1 trade settlement cycle. Staggering the compliance dates for these two regulatory changes increases the likelihood that affected parties will successfully implement new requirements without unnecessarily straining finite resources.

I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis, as well as the Office of the General Counsel, for their efforts.