The Securities and Exchange Commission voted today to adopt new
rules to establish enhanced standards for the operation and governance
of securities clearing agencies that are deemed systemically important
or that are involved in complex transactions, such as security-based
swaps. The Commission also voted to propose to apply the enhanced
standards established by the new rules to other categories of securities
clearing agencies, including all SEC-registered central counterparties.
"Securities clearing agencies are a vital part of the
infrastructure underpinning the U.S. financial system," said SEC Chair
Mary Jo White. "The Commission has taken an important step today
toward enhancing investor protection and ensuring that clearing agencies
continue to be subject to effective regulations that appropriately
address the risks they pose to the financial system."
The Dodd-Frank Wall Street Reform and Consumer Protection Act
called for an enhanced regulatory framework for certain securities
clearing agencies, which perform a range of services critical to the
effective operation of the securities markets, including acting as
intermediaries between the parties to a securities transaction, ensuring
that funds and securities are correctly transferred between parties
and, in some cases, assuming the risks of a party defaulting on a
transaction by acting as a central counterparty.
The rules adopted today apply to SEC-registered securities clearing
agencies that have been designated as systemically important by the
Financial Stability Oversight Council (FSOC) or that are involved in
more complex transactions. Securities clearing agencies covered by
the new rules will be subject to new requirements regarding, among
other things, their financial risk management, governance, recovery
planning, operations, and disclosures to market participants and the
public.
The Commission's proposal would apply the newly-adopted rules to
other categories of securities clearing agencies, including all
SEC-registered securities clearing agencies that are central
counterparties, central securities depositories, or securities
settlement systems. The public will have 60 days to comment after
publication in the Federal Register.
The adopted rules will become effective 60 days after publication
in the Federal Register. Affected securities clearing agencies
must comply with the requirements 120 days after the effective date.
FACT SHEET
Enhanced Regulatory Framework for Covered Clearing Agencies
SEC Open Meeting
Sept. 28, 2016
Action
The Securities and Exchange Commission will consider whether to adopt
rules to strengthen the regulatory framework for clearing agencies that
are designated as systemically important or that are involved in complex
transactions, such as security-based swaps. The Commission will
also consider whether to propose amendments to the new rules that would
require other types of clearing agencies to be subject to the enhanced
framework.
These initiatives are part of the Commission's ongoing effort to
strengthen its oversight of clearing agencies in order to better address
potential systemic risks and enhance investor protection, and would
adhere to a global set of standards.
Highlights
The rules are consistent with relevant global standards for clearing
agencies, such as the CPMI-IOSCO principles for financial market
infrastructures (PFMI). The rules are also consistent with the
Commission's obligations for clearing agency oversight under the
Dodd‑Frank Wall Street Reform and Consumer Protection Act. In
developing these rules, the Commission staff consulted with the
Financial Stability Oversight Council (FSOC), the Commodity Futures
Trading Commission (CFTC), the Board of Governors of the Federal Reserve
System and the Federal Deposit Insurance Corporation (FDIC).
Under Rule 17Ad-22(e), which the Commission is considering whether to
adopt, a covered clearing agency would be required to establish,
implement, maintain, and enforce policies and procedures reasonably
designed to address all major aspects of its operations, including its
governance, risk management (including financial, business, and
operational risks), access requirements, and settlement and depository
systems.
Governance and Comprehensive Risk Management
- Rule 17Ad-22(e)(2) would require a
covered clearing agency to have policies and procedures that establish
qualifications of members of boards of directors and senior management
of a covered clearing agency, specify clear and direct lines of
responsibility, and consider the interests of relevant stakeholders in
the covered clearing agency.
- Rule 17Ad-22(e)(3) would require a
covered clearing agency to have policies and procedures for recovery and
wind-down planning. It also would require policies and procedures
designed to ensure that risk management and internal audit personnel
have sufficient authority, resources, independence from management, and
access to the board to fulfill their functions effectively.
Financial Risk Management
- Credit Risk: Rule
17Ad-22(e)(4) would require a covered clearing agency to have policies
and procedures for daily stress testing, monthly review and annual
validation of credit risk models.
- Collateral: Rule
17Ad-22(e)(5) would require a covered clearing agency to have policies
and procedures regarding setting and enforcing appropriately
conservative haircuts and concentration limits and subjecting them to
annual review at least annually.
- Rule 17Ad-22(e)(6) would require a
covered clearing agency to have policies and procedures for marking
positions to market, collecting margin at least daily, and conducting
daily backtesting, monthly sensitivity analyses, and performing model
validation at least annually.
- Liquidity Risk:
Rule 17Ad-22(e)(7) would require a covered clearing agency to have
policies and procedures that address holding "qualifying liquid
resources" sufficient to withstand the default of the participant family
that would generate the largest aggregate payment obligation in extreme
but plausible market conditions. A covered clearing agency also
would be required to have policies and procedures to test the
sufficiency of its liquidity providers.
General Business Risk
Rule 17Ad-22(e)(15) would require a covered clearing agency to have
policies and procedures that provide for holding liquid net assets
funded by equity equal to at least six months of current operating
expenses so that the covered clearing agency can continue operations
during a recovery or wind-down. The rule also would require
policies and procedures to maintain a viable plan – approved by the
board of directors and updated at least annually – for raising
additional equity should its equity fall close to or below the amount
required.
Scope of Coverage
Rule 17Ad-22(e) generally would apply to clearing agencies designated as
systemically important financial market utilities by FSOC and for which
the Commission is the supervisory agency under the Dodd-Frank Act and
clearing agencies involved in activities with a more complex risk
profile for which the CFTC is not the supervisory agency under the
Dodd-Frank Act. Rule 17Ab2-2 would establish procedures for the SEC to
make determinations about certain financial resource requirements a
covered clearing agency would have to satisfy depending on specific
factors, such as whether the covered clearing agency is systemically
important in multiple jurisdictions or provides central counterparty
services for products with a more complex risk profile.
Amendments to Rule 17Ad-22, which the Commission is separately
considering whether to propose, would expand the definition of "covered
clearing agency" beyond designated clearing agencies and complex risk
profile clearing agencies to any registered clearing agency that
provides the services of a central counterparty, central securities
depository, or a securities settlement system.
Background
A clearing agency acts as a middleman between the parties to a
securities transaction, performing a range of services important for the
effective operation of the securities markets. These services
include, for example, ensuring that funds and securities are correctly
transferred between parties and, in some cases, assuming the risks of a
party defaulting on a transaction by acting as a "central counterparty."
The SEC has overseen securities clearing agencies since 1975, when
Congress provided it with broad authority to write rules under Section
17A of the Exchange Act. Title VIII of the Dodd-Frank Act enhanced
the SEC's authority to adopt rules addressing risk management standards
for securities clearing agencies that have been designated systemically
important by the FSOC.
The SEC serves as the supervisory agency for four of the designated
clearing agencies, and the CFTC serves as the supervisory agency for the
remaining two.
In 2012, the SEC adopted Rule 17Ad-22 under the Exchange Act, which
established standards for the risk management and operation of
registered clearing agencies. New Rule 17Ad-22(e) builds on existing
Rule 17Ad-22 by subjecting certain clearing agencies to enhanced
policies and procedures requirements concerning risk management,
operations, governance, and disclosure.
What's Next
The final rules, if adopted, will become effective 60 days after
publication in the Federal Register. Covered clearing agencies
must comply with the requirements 120 days after the effective date.
The SEC will seek public comment on the
proposed rules for 60 days following publication in the Federal
Register. The SEC will then review the comments and determine
whether to adopt final rules.