The SEC voted to propose new rules that would enhance the oversight of clearing agencies that are deemed to be systemically important by the Financial Stability Oversight Council (“FSOC”) or that are involved in complex transactions, such as security-based swaps (“covered clearing agencies”). The covered clearing agencies would be subject to new and “more robust” requirements regarding their financial risk management, operations, governance, and disclosures to market participants and the public. The proposal also would establish procedures for the Commission to use to apply the new requirements to additional clearing agencies.
The proposal would amend Exchange Act Rule 17Ad-22 (“Standards for Clearing Agencies”) and add Rule 17Ab-2-2, pursuant to Exchange Act Section 17A (“National System for Clearance and Settlement of Securities Transactions”) and the Payment, Clearing and Settlement Supervision Act of 2010 adopted in Dodd-Frank Title VIII. Specifically, the proposed rules would require covered clearing agencies to adopt policies and procedures to address systemic risk concerns in the areas of governance, financial risk management, stress testing, default management and operational risk management, among others. The proposal includes rules that address a covered clearing agency’s operational risks, such as deficiencies in information systems and internal controls, unauthorized intrusions into automated systems and disruptions from natural disasters.
According to SEC Commissioner Aguilar, it is “important to note that these rules are designed to work hand in hand with the Commission’s pending Regulation SCI, which will cover all clearing agencies.” Commissioner Piwowar stated that, while he is pleased that the SEC is reviewing the oversight of clearing agencies proactively, he is “not convinced that the proposal sufficiently justifies the imposition of the entire package of new requirements,” and noted that the SEC should not ignore the significant costs and economic effects that would result from the new proposed rules.
Lofchie Comment: Neither Commissioner Gallagher nor Commissioner Piwowar expressed much enthusiasm for the proposed new rule. It seems notable that the SEC thought it necessary to issue this 400-plus-page release so soon after issuing proposed Regulation SCI, in that its issuance further emphasizes the difficulties that regulated firms of all types have in attempting to keep up with the pace of new regulations.
To the extent that this rule is intended to prepare the clearing corporations for clearing equity swaps, the proposal wastes resources. The great benefits of central clearing remain unproven, but at least in plain-vanilla interest rate and index credit swaps, there is enough volume to support the effort of establishing and maintaining the clearing system. The existence of that much volume in most security-based swaps seems doubtful, so expending a great amount of governmental and private sector effort on building a clearing system for these swaps appears to be both wasteful and a distraction from more genuine issues.
See: Proposed Standards for Covered Clearing Agencies; Fact Sheet on Proposed Rule.
See also: Chair White’s Opening Statement; Commissioner Kara Stein’s Statement; Commissioner Piwowar’s Statement; Commissioner Gallagher’s Statement; Commissioner Aguilar’s Statement.