On Friday, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) held a roundtable discussion on “issues related to governance and conflicts of interest in the clearing and listing of swaps and security-based swaps.” The discussion was intended to help the two agencies with their rule-making responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The roundtable consisted of two panels that included representatives from clearing organizations, exchanges, members, investors, interdealer brokers, academic institutions and other organizations. The discussion centered on the following topics:
Panel One — Types of Conflicts
- Securities Clearing Agencies and Derivatives Clearing Organizations
- Security-Based Swap Execution Facilities and Swap Execution Facilities
- Designated Contract Markets and National Securities Exchanges
Panel Two — Possible Methods for Remediating Conflicts
- Ownership and voting limits
- Structural governance arrangements
- Substantive requirements
- Appropriateness of applying the same methods to each type of entity
The first panel focused on potential conflicts related to clearinghouses, swap execution facilities, designated contract markets and national exchanges. With respect to clearinghouses, the panelists generally supported the idea of open access, but had varying opinions on the balance between open access and risk management. Some panelists were concerned that certain membership qualifications prevented open access to the clearinghouses, while others focused on the importance of sufficient capital and other risk management measures. Certain panelists also expressed concern about potential conflicts related to clearinghouses and exchanges that also have an execution function, as well as exchanges that only use specific clearinghouses.
The second panel focused on “possible methods for remediating conflicts.” The panelists debated the value of potential ownership caps on both economic and voting ownership levels of clearing and trade facilities. Jason Kastner, of the Swaps and Derviatives Market Association, and Heather Slavkin, of the AFL-CIO, both expressed support for ownership caps as a means of regulation. Lynn Martin, of NYSE Liffe U.S., disagreed and instead supported good governance at a board level, rather than specific ownership caps. Ms. Slavkin countered that supporting organizational governance is just “supporting the status quo” and that ownership caps represent actual change to the current system. Although a 20% ownership restriction that was originally contemplated for the Dodd-Frank Act did not make the final version, the legislation does give the SEC and the CFTC the authority to require ownership limitations.
The second panel also discussed potential rules related to board composition of these organizations. In this context, the panelists considered the meaning of “independent,” the differing needs of public and private organizations and whether it would be beneficial to mandate a minimum percentage of independent directors. Panelists noted the importance of independence but also stressed the need for expertise in the applicable areas.
The SEC and CFTC recently announced advance notice of proposed rulemaking regarding certain aspects of the Dodd-Frank Act, but are also inviting the public to submit their views on the topics discussed in Friday’s roundtable through the SEC or the CFTC websites.