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SEC Reopens the Comment Period for Proposed Regulation MC

March 18, 2011

The Dodd-Frank Act enhanced the SEC’s authority to adopt rules addressing risk management standards for clearing agencies. On October 26, 2010, the Commission proposed Regulation MC to address potential conflicts of interest in the ownership, voting, and governance of security-based swap clearing agencies, security-based swap execution facilities (SB SEFs), and security-based swap (SBS) exchanges. On March 8, 2011, the SEC reopened the period for submitting comments on proposed Regulation MC.

Photo by Sage Ross. Some rights reserved.

Overview of Proposed Regulation MC

The Commission proposed two alternative rules for security-based swap clearing agencies that would each impose different degrees of voting and governance restrictions on such entities. The first alternative places an emphasis on voting limitations while also imposing certain governance restrictions (“Voting Interest Focus Alternative”);  the second alternative places an emphasis on governance restrictions while also imposing certain voting limitations (“Governance Focus Alternative”).  Additionally, the Commission proposed a set of rules that would impose ownership and governance limitations on SB SEFs and SBS exchanges.   More detail on each of these three below.

Voting Interest Focus Alternative

The Voting Interest Focus Alternative prohibits a security-based swap clearing agency participant, either alone or together with a related person, from beneficially owning or voting more than 20 percent of the security-based swap clearing agency’s voting stock. This proposal also includes a 40 percent aggregate voting limitation and a requirement that the security-based swap clearing agency have a voting interest divestiture procedure. Additionally, at least 35 percent of the security-based swap clearing agency’s Board members must be independent.

Governance Focus Alternative

The Governance Focus Alternative prohibits a security-based swap clearing agency participant, either alone or together with a related person, to beneficially own or vote more than 5 percent of the security-based swap clearing agency’s clearing agency’s voting stock. It also requires a security-based swap clearing agency to have a voting interest divestiture procedure. This alternative would also require the Board of a security-based swap clearing agency to be composed of a majority of independent directors. No director may qualify as an independent director unless the Board affirmatively determines that the director does not have a material relationship with either the security-based swap clearing agency and its affiliates, or with a participant in the security-based swap clearing agency and its affiliates.

Ownership and Governance Limitations on SB SEFs and SBS Exchanges

The Commission proposes that an SB SEF, SBS exchange, or SBS exchange facility shall not permit any SB SEF participant or SBS exchange member, either alone or together with a related person, to beneficially own or vote more than 20 percent of the security-based swap clearing agency’s voting stock. Additionally, it must have a voting interest divestiture procedure; a Board composed of a majority of independent directors; a regulatory oversight committee; as well as other committees.

Additional Comments

Since the Commission proposed Regulation MC, it has alsoproposed Regulation SB SEF and other rules regarding the registration of clearing agencies and standards for the operation and governance of clearing agencies. In light of these more recent proposals, the SEC has reopened the comment period on Regulation MC to solicit comments. Comments should be submitted on or before April 29, 2011. View the release reopening the comment period here.

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