Jessica Wachter Chief Economist SEC: "The proposed amendments would require that the clearing agency mark positions to market at least daily, monitor risk on an ongoing basis & have the capability to collect margin depending on changes in clearinghouse conditions, such as a breach of risk capacity"
Covered Clearing Agency Resilience and Recovery and Wind-Down Plans
Good morning, Chair Gensler and Commissioners. Today, the Commission is proposing to strengthen resiliency standards of covered clearing agencies through a new rule and new amendments.
Covered clearing agencies are an essential part of the infrastructure of financial markets. They govern the process through which trades are cleared – namely prepared for settlement of cash and securities. Without proper functioning of clearing agencies, trust in the basic functioning of financial markets would be called into question.
This rule pertains to recovery and wind-down. Recovery is the process by which a covered clearing agency maintains its ability to perform critical services, should losses render it insolvent. Wind-down is the process by which services would be transferred to another entity – presumably an unlikely event in the case of a clearinghouse. The proposed rule adds specificity to already-required plans for recovery and wind-down, for example, that the covered clearing agency have procedures for testing plans and for board reviews. We expect that this would reduce the risk of an unsuccessful recovery that may spill over to other parts of the market, potentially contributing to a major market disruption.
The Commission is also considering proposing amendments to existing rules governing the determination of margin. Should a market participant fail to perform on a financial contract, the clearinghouse must stand in its stead. Thus the clearinghouse is exposed to the failure of market participants. To protect itself, the clearinghouse collects extra cash and securities from all market participants. The risk of failure may not be uniform, and may change even within the day. The proposed amendments would require that the clearing agency mark positions to market at least daily, monitor risk on an ongoing basis, and have the capability to collect margin depending on changes in market conditions, such as volatility, or changes in clearinghouse conditions, such as a breach of risk capacity.
These changes involve unfettered access to data. The rule requires redundancy around pricing and other data inputs. These changes should promote the functioning of the clearinghouse during times of systemic disruption, ultimately enabling more reliable transfer of risk and promoting capital formation.
This proposal aims to promote the resiliency of covered clearing agencies. While in some ways it reflects current market practice, in others it raises standards. Because we believe that market forces, including those governing the market for clearing, may lead to underinvestment in resiliency, regulation will have the benefit of better outcomes for market participants.
Generally, we estimate small compliance costs in this proposed rule and amendments.
In closing, I thank our colleagues from the Division of Trading and Markets, the Office of the General Counsel, and others for their collaboration, and I thank all of you today for your attention.
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.