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U.S. Securities and Exchange Commission Adopts Rules to Improve Clearing Agency Governance and Mitigate Conflicts of Interest

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The US Securities and Exchange Commission (SEC) has adopted new rules to improve the governance of all registered clearing agencies by reducing the likelihood of conflicts of interest which may influence their boards of directors or equivalent governing bodies.
 
These rules are being adopted in accordance with various statutory provisions, including the Dodd-Frank Act, which explicitly instructs the SEC to formulate rules aimed at mitigating conflicts of interest for security-based swap clearing agencies.
 
Clearing agencies, defined in Section 3(a)(23)(A) of the Securities Exchange Act of 1934. It primarily function as central counterparties (“CCP”) or central securities depositories (“CSD”). As a CCP, they interpose between counterparties in securities transactions, while as a CSD, they operate a centralized system for managing securities certificates.
 
The new rules were proposed last year on August 23, 2022 by the SEC aim to increase transparency into board governance, and, more generally, improve the alignment of incentives among owners and participants of a registered clearing agency.
 
It provides that the majority of the board of directors or 34% of the directors (if majority stake is owned by participants), must be independent directors. Further, ‘first cousins’ have been added to the definition of “family members”.
 
The adopted rules define an “independent director” to mean a director that has no material relationship with the registered clearing agency, or any affiliate thereof.
 
“Material relationship” is defined as a relationship, whether compensatory or otherwise, that reasonably could affect the independent judgment or decision-making of the director, and includes relationships that existed during a lookback period of one year counting back from making the initial independence determination.
 
These rules will help establish governance requirements regarding board composition, independent directors, nominating committees, and risk management committees of registered clearing agencies. The rules also require new policies and procedures regarding conflicts of interest, management of risks from relationships with service providers for core services, and a board obligation to consider stakeholder viewpoints.
 
In India, Clearing corporations are governed under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018. The Regulations provide for a robust Code of Conduct and Code of Ethics for the Clearing corporations, its board and various committees.
 
Readers are welcome to share their view with Regstreet Law Advisors at info@regstreetlaw.com.
 
A copy of the SEC Rules is enclosed below and can also be accessed at: https://www.sec.gov/files/rules/final/2023/34-98959_0.pdf

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