ABA Securities Association
Financial Services Roundtable
Futures Industry Association
International Swaps and Derivatives Association
Securities Industry and Financial Markets Association

April 29, 2011

Ms. Elizabeth M. Murphy

Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: Reopening of the Comment Period on Ownership Limitations and Governance Requirements
for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and
National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC
(File No. S7-27-10)

Dear Ms. Murphy:

The Securities and Exchange Commission (“SEC”) has proposed Regulation MC 1 which contains various
ownership limitations and governance requirements for security-based swap clearing agencies (“Clearing
Agencies”), security-based swap execution facilities (“SB SEFs”), and national securities exchanges. We
previously have submitted several comment letters with respect to Regulation MC, including: ISDA’s
comment letter dated November 23, 2010 2 , SIFMA’s comment letter dated November 12, 2010 3 , and a
letter cosigned by six trade associations dated January 11, 2011 4 that responds to comments submitted to
the Commodity Futures Trading Commission by U.S. Department of Justice staff. We are sending this
letter in response to the SEC’s reopening 5 of the comment period for Regulation MC in light of its
subsequent SB SEF Proposing Release 6 and Clearing Agency Proposing Release. 7 As in SIFMA’s
November 12 comment letter on proposed Regulation MC, we are focusing our comments on the SEC’s
proposed limits on ownership and voting power, specifically the proposed limits applicable to Clearing
Agencies.

                                                            
1
Securities Exchange Act Release No. 63107 (October 14, 2010). 
2
Please see ISDA comment letter submitted 11/23/10. 
3
Please see SIFMA pre-comment letter submitted 11/12/2010. 
4
Please see Joint Trade Association letter submitted in response to DOJ letter on 1/11/11. The ABA Securities
Association, The Clearing House Association L.L.C., Financial Services Roundtable, Futures Industry Association,
International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association signed
the letter. 
5
Securities Exchange Act Release No. 64018 (March 3, 2011). 
6
Securities Exchange Act Release No. 63825 (February 2, 2011). 
7
Securities Exchange Act Release No. 64017 (March 2, 2011). 
 

We believe the proposed limits are neither necessary nor appropriate. In this regard, we wish to reiterate
several key points made in SIFMA’s November 12 letter:

• Imposing unduly restrictive limits on the voting interests of Clearing Agency

participants, either individually or in the aggregate, would run counter to the intention of
Congress to increase clearing of swap transactions. “If swap dealers are precluded from
having a meaningful ownership interest – individually or in concert – in . . . Clearing
Agencies, they are less likely to contribute their expertise or investment capital to
establishing and operating such an entity. As a result, fewer . . . Clearing Agencies will
be established and there will be less competition in the provision of efficient clearing
services.”
• Concerns that swap dealers might use their aggregate control of a Clearing Agency to
limit the extent of swap transaction clearing are misplaced. Dealers have an incentive to
clear because “[c]learing reduces individual counterparty risk and systemic risk, and
dealers, along with other market participants benefit from that risk reduction. Moreover,
clearing facilitates trade compression (eliminating offsetting transactions) which further
reduces dealers’ risk exposure. That dealers have an incentive to clear is demonstrated
by the fact that even before . . . Dodd-Frank [dealers were] clearing a substantial portion
of their inter-dealer interest rate swaps.”
• Allegations of anti-competitive behavior by swap dealers are both misleading and
incorrect. Representative Stephen F. Lynch (D-MA), for example, has made the
assertion that five banks control “upwards of 95% of the order flow on the existing over
the counter derivatives market.” These allegations are based on statistics published by
the Office of the Comptroller of the Currency that only reflect the activity of U.S. banks;
they do not take into account the activities of non-U.S. banks. “When non-U.S. bank
swap dealers are included in aggregate market data, the market share of the five largest
U.S.-based swap dealers is only 37% and the market share of the five largest swap
dealers overall is 45.6%.” In fact, swap markets have numerous participants and are
highly competitive.
• “[C]oncerns about conflicts of interest can be addressed through the . . . statutory
requirements applicable to Clearing Agencies.”

The trade associations’ January 11 letter made several other important points:

• Adoption of the aggregate ownership limits proposed by the staff of the Department of
Justice “would violate a key principle in antitrust law by imposing a burdensome set of
per se restrictions on the ownership of key market facilities in the absence of robust
empirical evidence demonstrating that such ownership would plainly lead to
anticompetitive consequences with little or no potential for redeeming pro-competitive
efficiencies.”
• We have “serious concerns with the proposed expansion of independent director
requirements beyond what is commercially reasonable at the Board level, particularly as
applied to nominating and risk committees.” Swap dealers and other potential investors
“will be disinclined to put [their] capital at risk without an ability to protect that capital

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through meaningful participation in governance, especially clearing members who have

so much to lose.”

We agree with the SEC’s decision to reopen the comment period for proposed Regulation MC,
because we believe that concerns about conflicts of interest can be addressed through various
other statutory and regulatory requirements imposed on Clearing Agencies. In its release
announcing the comment period reopening, the SEC notes that its Clearing Agency Proposing
Release includes “proposed rules . . . designed, in part, to address conflicts of interest affecting
clearing agencies.” 8

The Regulation MC proposal identified three key areas in which conflicts of interest might arise:
(i) participants could limit access to clearing; (ii) participants could limit the extent to which
clearing was available for particular products; and (iii) participants could influence a Clearing
Agency to lower its risk management standards and require less collateral and lower guaranty
fund commitments than it otherwise might. We believe these concerns are overstated and, in
any event, can be addressed by measures that are less onerous and less adverse to the public
interest than the ownership limits proposed in Regulation MC.

Although participants that control a Clearing Agency theoretically could limit access to clearing
services by competitors, that would not be an effective strategy because the clearing business
would simply go to another Clearing Agency. Moreover, the Clearing Agency Proposing
Release would require that Clearing Agency participation requirements be objective (i.e., based
on measurable facts) and facilitate fair and open access. 9 In that release the SEC states this will
“foster compliance with the requirement under Section 17A of the Exchange Act that the rules of
a clearing agency must not be designed to permit unfair discrimination in the admission of
participants.” 10 We do not believe there is any need for a belt-and-suspenders approach that
would layer on an additional limitation on aggregate ownership by participants, particularly
insofar as that additional limitation likely would have a significant adverse impact on
competition in the market to provide clearing services.

As explained in SIFMA’s November 12 letter (and mentioned above), we do not believe that
Clearing Agency participants would have an incentive to limit the extent to which clearing was
available for particular products. In fact, the risk reduction benefits of clearing, which are well
understood and appreciated by swap dealers, create an incentive to clear swaps whenever
possible. Furthermore, if a Clearing Agency decided not to clear a particular product, there
would be nothing to prevent another Clearing Agency from doing so. The participants in any
particular Clearing Agency have no ability to limit the availability of clearing services
elsewhere.

We also do not believe that Clearing Agency participants would have any incentive to influence
the Clearing Agency to lower its risk management standards and require less collateral and
lower guaranty fund commitments. In fact, again, their incentive would be to do the opposite.
                                                            
8
Securities Exchange Act Release No. 64018, page 8 (March 3, 2011). 
9
 Securities Exchange Act Release No. 64017, page 48 (March 2, 2011). 
10
Ibid. Exchange Act section 17A(b)(3) requires Clearing Agencies to provide fair access to clearing and a fair
procedure for the denial of participation to any person seeking participation in the Clearing Agency. 

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Participants will have significant exposure to the credit risk of a Clearing Agency and thus will
have a compelling incentive to ensure the Clearing Agency employs appropriate risk
management standards and requires adequate collateral from its counterparties and sufficient
guaranty fund commitments from all participants. Participants that also are investors in the
Clearing Agency will have a further incentive to ensure the Clearing Agency manages its risk
exposure in an effective manner. Moreover, the rules in the Clearing Agency Proposing Release
would reinforce the participant-investors’ risk avoidance incentives by requiring, among other
things, governance arrangements that “promote the effectiveness of the clearing agency’s risk
management procedures.” 11

Further assurance that conflicts of interest do not compromise the public interest in proper
Clearing Agency operation and management would be provided by the SEC’s Proposed Rule
17Ad-25: Clearing Agency Procedures to Identify and Address Conflicts of Interest. 12 This rule
requires that Clearing Agencies “establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify and [address] existing or potential conflicts of
interest.” 13 Clearing Agencies’ compliance with the requirements of this rule will be the
responsibility of their chief compliance officers, as specified in section 763 of the Dodd-Frank
Act. Managing conflicts in this manner is a common-sense approach that would avoid the
adverse effects of unnecessarily restrictive measures such as imposing limits on participants’
aggregate ownership interests.

In conclusion, we believe that the conflicts of interest created by participants having an

ownership interest in a Clearing Agency are limited and not readily susceptible to exploitation
and thus do not warrant overly proscriptive rules or numerical or percentage limitations on
ownership or voting power, particularly aggregate limits. We also believe the proposed rules to
address conflicts of interest that are set forth in the Clearing Agency Proposing Release, along
with the requirements of section 17A of the Exchange Act, will provide thorough protection
against potential conflicts causing actual harm. Accordingly, we urge the SEC not to include in
Regulation MC any limit on participants’ aggregate ownership of Clearing Agencies.

Respectfully yours,

ABA Securities Association

Financial Services Roundtable
Futures Industry Association
International Swaps and Derivatives Association
Securities Industry and Financial Markets Association

                                                            
11
Id. at 61. 
12
 Id. at 96-97. 
13
Id. at 96. 

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cc: Honorable Gary Gensler, Chairman

Honorable Bart Chilton, Commissioner
Honorable Michael Dunn, Commissioner
Honorable Scott O’Malia, Commissioner
Honorable Jill E. Sommers, Commissioner
Commodity Futures Trading Commission

Honorable Mary L. Schapiro, Chairman

Honorable Luis A. Aguilar, Commissioner
Honorable Kathleen L. Casey, Commissioner
Honorable Troy A. Paredes, Commissioner
Honorable Elisse B. Walter, Commissioner
Securities and Exchange Commission

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Trade Association Signatories

The ABA Securities Association (“ABASA”) is a separately chartered affiliate of the American Bankers
Association, representing those holding company members of the ABA that are actively engaged in
capital markets, investment banking, and broker-dealer activities.

The Financial Services Roundtable (the “Roundtable”) represents 100 of the largest integrated financial
services companies providing banking, insurance, and investment products and services to the American
consumer. Member companies participate through the Chief Executive Officer and other senior
executives nominated by the CEO. Roundtable member companies provide fuel for America’s economic
engine, accounting directly for $74.7 trillion in managed assets, $1.1 trillion in revenue, and 2.3 million
jobs.

The Futures Industry Association (“FIA”) is a principal spokesman for the commodity futures and
options industry. FIA’s regular membership is comprised of approximately 30 of the largest futures
commission merchants in the United States. Among its associate members are representatives from
virtually all other segments of the futures industry, both national and international. Reflecting the scope
and diversity of its membership, FIA estimates that its members effect more than eighty percent of all
customer transactions executed on United States designated contract markets. For more information, visit
www.futuresindustry.org.

The International Swaps and Derivatives Association, Inc. was chartered in 1985 and has over 800
member institutions from 54 countries on six continents. Our members include most of the world’s major
institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental
entities and other end users that rely on over-the-counter derivatives to manage efficiently the risks
inherent in their core economic activities. For more information, visit www.isda.org.

The Securities Industry and Financial Markets Association (“SIFMA”) brings together the shared
interests of hundreds of securities firms, banks and asset managers. SIFMA’s mission is to support a
strong financial industry, investor opportunity, capital formation, job creation and economic growth,
while building trust and confidence in the financial markets. SIFMA, with offices in New York and
Washington, D.C., is the U.S. regional member of the Global Financial Markets Association. For more
information, visit www.sifma.org.

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