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The US Securities and Exchange Commission (SEC) has proposed rule amendments that aim to strengthen resilience, recovery and wind-down procedures for clearing agencies.
These changes target obvious gaps in current risk management and recovery procedures at covered clearing agencies.
A covered clearing agency, in SEC lexicon, is a registered clearing agency that provides the services of a central counterparty or a central securities depository.
Most significantly, the proposal requires that clearing houses have a risk-based margin framework in place that monitors intraday exposure on an ongoing basis, along with the authority and operational capacity to make intraday margin calls “as frequently as circumstances warrant”.
This will include when the thresholds specified by the clearing house are breached or when products and markets display elevated volatility. These requirements appear to be fundamental to a clearing agency’s effective functioning.
Second, the proposal requires that a clearing house has alternative options in place when essential inputs to its risk-based margin system are unavailable or not reliable. Again, access to required data and inputs is fundamental to a clearing agency’s ability to monitor and mitigate credit risk and it is essential that access to key inputs is maintained at all times, with fall-back options in place in case of disruption, denial of service or inaccuracies in these key data inputs.
Additionally, the SEC proposal provides guidance on the content of recovery procedures and orderly wind-downs for US-based clearing houses. Prior to this, the Covered Clearing Agency Standards have required that a covered clearing agency includes a plan for recovery and orderly wind-down in its policies and procedures, but it has not specified which provisions should be included in those plans.
In the proposal, the SEC has highlighted nine elements that the clearing agency will be required to include in its plan. Inter alia, these include details of the clearing agency’s payments, clearing and settlement services and how it would continue to provide these services in the event of recovery or orderly wind-down.
The plan will also address the clearing agency’s use of third-party service providers to meet its critical payments, clearing and settlement services in the case of recovery or wind-down.
These plans should be reviewed by the clearing house’s board of directors at least every 12 months or as a result of material changes to the environment in which the clearing agency operates.
Commenting on the proposals, SEC chair Gary Gensler says: ‘Today’s proposals would help ensure the continuity of clearing services during times of significant stress. Well regulated and well managed clearing houses help lower risk for the public.
“I am pleased to support the proposal because, if adopted, it would help to 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.”
In 2016, the SEC adopted the Covered Clearing Agency Standards, which require covered clearing agencies to implement, maintain, and enforce written policies designed to meet minimum standards relating to, among other things, operations, governance, and risk management.
The recommended proposal would build upon the existing requirement in Rule 17Ad-22 that a covered clearing agency has policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, among other things, includes the authority and operational capacity to make intraday margin calls in defined circumstances.
The SEC has circulated the proposals for public consultation, which will continue for 60 days from its publication on the SEC website or for 30 days from its release in the Federal Register, whichever is longer.
