The SEC voted to adopt final rules to require securities clearing agencies that are deemed systemically important or that are involved in complex transactions (“covered clearing agencies”) to “establish, implement, maintain, and enforce policies and procedures reasonably designed to address all major aspects of [their] operations, including [their] governance, risk management (including financial, business, and operational risks), access requirements, and settlement and depository systems.” In addition, the SEC voted to propose the application of these enhanced standards to all SEC-registered central counterparties.
The adopted rules apply to SEC-registered securities clearing agencies that have been designated as systemically important by the Financial Stability Oversight Council (“FSOC”). The rules require a covered clearing agency to have policies and procedures that, among other things:
- establish the qualifications of members of boards of directors and the senior management of covered clearing agencies, specify clear and direct lines of responsibility, and consider the interests of relevant stakeholders in covered clearing agencies;
- address recovery and wind-down planning;
- address daily stress testing, monthly reviews and annual validation of credit risk models;
- set and enforce appropriately conservative haircuts and concentration limits, and subject them to review annually at the very least;
- mark positions to market, collect margin at least daily, and conduct daily backtesting and monthly sensitivity analyses, and perform model validation at least annually;
- address holding “qualifying liquid resources” that are sufficient to withstand the default of the participant family that would generate the largest aggregate payment obligation in extreme but plausible market conditions;
- test the sufficiency of their liquidity providers;
- provide for holding liquid net assets funded by equity equal to at least six months of current operating expenses in order to allow covered clearing agencies to continue operations during a recovery or wind-down; and
- maintain a viable plan, which must be approved by boards of directors and updated at least annually, for raising additional equity should that of covered clearing agencies fall close to or below the required amount.
In his statement at the open meeting, SEC Commissioner Michael S. Piwowar emphasized that he voted for the final rule and proposal, but expressed his misgivings:
I support today’s adopting and proposing releases as the best approach we currently have at setting heightened standards for the clearing agencies we regulate. However, this entire effort has the eerie feeling of re-arranging deck chairs on the Titanic. I hope that history will prove me wrong, but I fear that the Dodd-Frank Act has created too many icebergs for our financial system to safely navigate.
SEC Commissioner Kara M. Stein expressed reservations about the laxity of the final rules, which she said only “marginally decrease the risk posed by systemically important clearing agencies.”
Comments on the final rules must be submitted within 60 days after their publication in the Federal Register. If adopted, the final rules also will become effective 60 days after their publication in the Federal Register. Covered clearing agencies will be required to comply with the final rules no later than 120 days after the effective date.
Lofchie Comment: In statements that might have sounded familiar to Goldilocks, the three SEC commissioners voiced three different views on the final rules: Commissioner Stein said that they do too little, but are better than nothing, Commissioner Piwowar complained that they comprise a part of an ill-conceived scheme of regulation that exacerbates the problem of too-big-to-fail, while Chair Mary Jo White declared that the rules are just right.