Thank you, Chairman Schapiro. Let me first take a moment to thank Robert Cook and his staff from the Division of Trading and Markets for their work on the proposed rule. I have just a few comments.
Clearing agencies play a critical role in our markets, and ensuring their continued resilience and strength is an important element of supporting financial stability. Today’s proposal is intended to facilitate such objectives by proposing standards addressing the operation and governance of clearing agencies. The proposal today would set varying standards for CCPs, SBS CCPs, non-CCP clearing services and non-CCP SBS clearing services.
Importantly, the rules take into consideration relevant international risk management standards that have been developed by the Technical Committee of the International Organization of Securities Commissions (IOSCO) and the Committee on Payment and Settlement Systems of the Bank for International Settlements, and which the two bodies are currently in the process of strengthening and clarifying.
The proposed rule, informed as it is by the CPSS-IOSCO principles, appropriately focuses on the financial strength and resilience of clearing agencies. These entities — or at least the ones that provide CCP services — collect risks that would otherwise be scattered throughout the financial system and concentrate them in a single facility. This reduces one kind of systemic risk but increases another. The concentration of financial risk in a central facility requires that the clearing agency pay careful attention to its financial and operational capacity, and also the financial and operational capacities of its clearing members. If managed properly, a vibrant clearing system can operate to increase financial stability and promote confidence in the financial system. If managed improperly, the clearing system could instead have a destabilizing effect.
In addition to implementing the CPSS-IOSCO principles, the proposed rule also directs clearing agencies to establish and articulate standards on a number of specific governance issues. It may well be appropriate for regulators to require clearing agencies to develop such standards on their own and I look forward to commenters’ views on this. However, taking more prescriptive steps — such as dictating governance standards or micromanaging governance decisions — would not be sound policy and would divert scarce Commission resources away from key regulatory objectives. There is a danger here of solving for too much and indeed, perhaps, doing so at the expense of greater risk management objectives and the overarching goals of stability and resilience in the clearing agency system.
Governance issues, including the mitigation of conflicts of interest, have been the subject of multiple proposed rules promulgated by the Commission pursuant to Dodd-Frank. In October of last year, the Commission proposed Regulation MC, which purports to mitigate potential conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and security-based swap exchanges. Also, in February of this year, the Commission proposed Regulation SB SEF, which addressed the regulation and registration of security-based swap execution facilities. That release included proposals purporting to address potential conflicts of interest at security-based swap execution facilities, and it invited comment on the interaction of proposed Regulation SB SEF with proposed Regulation MC. Today’s release, as noted, also includes, among other things, proposals to require clearing agencies to consider board governance and conflicts of interest issues and to establish, implement, maintain, and enforce written policies and procedures reasonably designed to address such issues.
All three of these proposing releases grapple with some of the same issues in different but related contexts. Accordingly, they deserve to be considered holistically rather than as separate and distinct rulemakings. The parties who commented on proposed Regulation MC did not have the benefit of the Commission’s thinking on proposed Regulation SB SEF or the proposed rule regarding clearing agency standards when they filed their Regulation MC comments.
Accordingly, I am pleased that the Commission has determined to reopen the comment period for Regulation MC. Doing so will allow the public to provide further comment on the conflict-of-interest proposals in Regulation MC in light of the treatment of such issues in proposed Regulation SB SEF and today’s proposed rule regarding clearing agency standards.
In conclusion, I’d like to again thank the staff for their thoughtful work on the clearing agency standards release, and I look forward to the submission of further comments on proposed Regulation MC. I have no questions.