Haoxiang Zhu Director Division of Trading on proposed SEC changes:
"The changes would provide that the margin system must monitor intraday exposure and further specify the circumstances in which a covered clearing agency must have the authority and operational capacity to make intraday margin calls"
Covered Clearing Agency Resilience and Recovery and Wind-Down Plans
https://www.sec.gov/news/statement/zhu-covered-clearing-agency-resilience-05-17-2023
TLDRS:
The first set of changes would amend the requirements applicable to a covered clearing agency’s risk-based margin system. The changes would provide that the margin system must monitor intraday exposure and further specify the circumstances in which a covered clearing agency must have the authority and operational capacity to make intraday margin calls. The Division believes that it is essential that a covered clearing agency monitors its intraday exposure because it faces a risk that its exposure to its participants can change rapidly as a result of intraday changes in prices, positions, or both.
The changes would also provide that, in the event that the covered clearing agency relies on substantive inputs from third parties to calculate margin, the covered clearing agency must have procedures that would apply when such inputs are not readily available or reliable. Such substantive inputs could include, for example, portfolio size, volatility, and sensitivity to various risk factors that are likely to influence security prices. The Division believes that establishing procedures for when such substantive inputs from third parties are not available or reliable should help ensure that the covered clearing agency can continue to calculate and collect margin.
Full Statement:
Good morning Chair Gensler and Commissioners Peirce, Crenshaw, Uyeda, and Lizarraga.
Today, the Division of Trading and Markets recommends that the Commission propose two sets of changes to the rules applicable to covered clearing agencies under the Exchange Act. The objective is to improve the resilience and recovery and wind-down planning for covered clearing agencies.
The first set of changes would amend the requirements applicable to a covered clearing agency’s risk-based margin system. The changes would provide that the margin system must monitor intraday exposure and further specify the circumstances in which a covered clearing agency must have the authority and operational capacity to make intraday margin calls. The Division believes that it is essential that a covered clearing agency monitors its intraday exposure because it faces a risk that its exposure to its participants can change rapidly as a result of intraday changes in prices, positions, or both.
The changes would also provide that, in the event that the covered clearing agency relies on substantive inputs from third parties to calculate margin, the covered clearing agency must have procedures that would apply when such inputs are not readily available or reliable. Such substantive inputs could include, for example, portfolio size, volatility, and sensitivity to various risk factors that are likely to influence security prices. The Division believes that establishing procedures for when such substantive inputs from third parties are not available or reliable should help ensure that the covered clearing agency can continue to calculate and collect margin.
The second set of changes would add a new rule to require certain elements in a covered clearing agency’s recovery and wind-down plan. Currently, the Covered Clearing Agency Standards require only that a covered clearing agency have such a plan, but does not provide any further specificity as to its contents.
The Division believes that these amendments would strengthen and augment the existing Covered Clearing Agency Standards, thereby improving risk management and resilience of covered clearing agencies. The Division also believes that the additional requirements with respect to recovery and wind-down planning would strengthen the plans overall.
In a moment, I will introduce Elizabeth Fitzgerald in the Office of Clearance and Settlement who will discuss the proposed rule changes in more detail. Before I do, I would like to take a moment to thank our colleagues from across the Commission that contributed to this proposal, including staff in the Division of Economic and Risk Analysis, the Office of the General Counsel, the Division of Examinations, and the Division of Enforcement. Their input was invaluable in preparing this proposal. I would also like to thank our colleagues from the Board of Governors of the Federal Reserve, the U.S. Commodity Futures Trading Commission, and the Federal Deposit Insurance Corporation, for their helpful feedback.
I will now turn it over to Elizabeth. Thank you.
Proposed Rule (130 pages):
Press Release: https://www.sec.gov/news/press-release/2023-95
The Securities and Exchange Commission today proposed rule changes that would improve the resilience and recovery and wind-down planning of covered clearing agencies. The proposal would amend the existing rules regarding intraday margin and the use of substantive inputs to a covered clearing agency’s risk-based margin system and add a new rule to establish requirements for the contents of a covered clearing agency’s recovery and wind-down plan.
“Today’s proposal would help ensure the continuity of clearing services during times of significant stress,” said SEC Chair Gary Gensler. “Well-regulated and well-managed clearinghouses help lower risk for the public. I am pleased to support the proposal because, if adopted, it would help enhance the resiliency of this part of our market plumbing, which is fundamental for the capital markets to operate. That benefits investors, issuers, and the markets alike.”
Specifically, the proposal would require that a covered clearing agency have policies and procedures to establish a risk-based margin system that monitors intraday exposure on an ongoing basis and includes the authority and operational capacity to make intraday margin calls as frequently as circumstances warrant, including when risk thresholds specified by the covered clearing agency are breached or when the products cleared or markets served display elevated volatility. The proposal would also require that a covered clearing agency have policies and procedures to establish a risk-based margin system that address the use of substantive inputs to its risk-based margin system, specifically, when such inputs are not readily available or reliable.
The proposal also includes a new rule, which would build upon the existing requirement that a covered clearing agency have a recovery and wind-down plan and specify nine elements that a covered clearing agency would be required to include in its recovery and wind-down plan.
The public comment period will remain open for 60 days following publication of the proposing release on the SEC website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
