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U.S. Securities and Exchange Commission

SEC Proposes Clearing Agency Standards for Operations and Governance


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Washington, D.C., March 2, 2011 – The Securities and Exchange Commission today voted to propose rules in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Securities Exchange Act of 1934 regarding the operation and governance of clearing agencies.

The Commission also voted to reopen the public comment period for rules proposed in October to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post or make available for trading security-based swaps.

Clearing agencies generally act as a middleman to the parties in a securities transaction. They play a critical role in the securities markets by ensuring that transactions settle on time and on the agreed-upon terms.

“The proposed rules are designed to further strengthen our oversight of clearing agencies and mitigate systemic risk concerns brought to light following the financial crisis,” said SEC Chairman Mary L. Schapiro.

Among the things that the proposed rules would require of clearing agencies:

  • Maintain certain standards with respect to risk management and operations.
  • Have adequate safeguards and procedures to protect the confidentiality of trading information.
  • Have procedures that identify and address conflicts of interest.
  • Require minimum governance standards for their boards of directors.
  • Designate a chief compliance officer.
  • Disseminate pricing and valuation information if they perform central counterparty services for security-based swaps.

Public comments on the rule proposals should be received by April 29, 2011.

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Fact Sheet

Clearing Agency Standards for Operation and Governance


A clearing agency generally acts as a middleman between the parties to a transaction, and when acting as a central counterparty it assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide such benefits as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades. Because of the integral role that clearing agencies play in the securities market, Congress directed the SEC to oversee these entities.

Under Section 17A of the Securities Exchange Act, the Commission already has authority to write rules governing clearing agencies. The Dodd-Frank Act enhanced the Commission’s authority to adopt rules addressing risk management standards for clearing agencies that are systemically important. The Dodd-Frank Act also amended the Securities Exchange Act to grant the Commission authority to write rules governing those who are registered as clearing agencies for security-based swaps.

Proposed Rules for Clearing Agency Standards of Operation and Governance

The proposed rules would create the standards for how clearing agencies should operate and be governed.

  1. The proposal would require a clearing agency that performs central counterparty services to:

    • Measure and manage credit exposures to its participants.
    • Use margin requirements to limit exposures to participants and review the methodologies supporting those margin requirements.
    • Maintain sufficient financial resources to withstand a default by either the one participant or the two participants to which the clearing agency or the security-based swap clearing agency, respectively, has its largest exposures.
    • Provide for an annual model validation of its margin models and related parameters and assumptions.
    • Provide the opportunity for those who do not perform dealer or security-based swap dealer services with the opportunity to obtain membership.
    • Not require a minimum portfolio size or transaction volume in its membership standards.
    • Provide the opportunity for scalable access to clearing services based on a participant's net capital.
    • Calculate and maintain records of financial resources.

  2. The proposed rules also would require each clearing agency to (as applicable):

    • Have rules and procedures that provide for a well founded, transparent and enforceable legal framework.
    • Require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation and publicly disclose the clearing agency's participation requirements.
    • Hold assets in a manner whereby risk of loss or delay is minimized and assets are invested in instruments with minimal credit, market and liquidity risks.
    • Identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures.
    • Employ money settlement arrangements that eliminate or strictly limit settlement bank risks and require funds transfers to the clearing agency to be final when effected.
    • Be cost-effective in meeting the requirements of participants while maintaining safe and secure operations.
    • Evaluate risks involved with any link arrangements and ensure they are managed prudently.
    • Have governance arrangements that are clear and transparent and promote the effectiveness of risk management.
    • Provide market participants with sufficient information for them to identify and evaluate the risks and costs associated with the clearing agency's services.
    • Immobilize and dematerialize stock certificates and transfer them by book entry to the greatest extent possible.
    • Make key aspects of its default procedures publicly available and establish default procedures that ensure timely action to contain losses and liquidity pressures.
    • Ensure settlement no later than the end of the settlement day and require intraday or real-time finality where necessary to reduce risks.
    • Eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment.
    • Institute risk controls to address participants' failure to settle when the clearing agency performs central securities depository services and extends intraday credit.
    • State to participants the clearing agency's obligations with respect to physical delivery risks and identify and manage associated risks.
    • Post an annual audited financial report to its website.

  3. The proposed rules require dissemination of pricing and valuation information by security-based swap clearing agencies that perform central counterparty services.

  4. The proposed rules require all clearing agencies to have adequate safeguards and procedures to protect the confidential trading information of clearing agency participants.

  5. The proposed rules exempt certain security-based swap dealers and security-based swap execution facilities from the definition of a clearing agency.

  6. The proposal amends rules concerning registration of clearing agencies to account for security-based swap clearing agencies and to make other technical changes.

  7. The proposed rules require all clearing agencies to have procedures that identify and address conflicts of interest.

  8. The proposed rules require minimum standards for all members of clearing agency boards of directors or committees.

  9. The proposed rules require all clearing agencies to designate a chief compliance officer.

Re-opening the Comment Period for Regulation MC

In addition to requiring rules regarding the operation and governance of clearing agencies, the Dodd-Frank Act also requires the Commission to adopt rules intended to mitigate conflicts of interest at clearing agencies that clear security-based swaps. It also requires conflict-mitigating rules for security-based swap execution facilities and national securities exchanges that post or make available for trading security-based swaps.

In October, the Commission proposed Regulation MC intended to mitigate such conflicts. In particular, Regulation MC would require security-based swap clearing agencies, security-based SEFs and security-based swap exchanges to adopt ownership and voting limitations as well as certain governance requirements.

Proposed Regulation MC contains ownership and governance limitations designed to mitigate conflicts of interest with respect to security-based swap clearing agencies, security-based SEFs, and security-based swap exchanges.

These proposed rules for clearing agency standards for operation and governance and Regulation SB SEF (which the Commission proposed in February) also include rules that are designed in part to mitigate conflicts of interest at clearing agencies and at security-based SEFs. In light of these proposals, the Commission is re-opening the comment period for proposed Regulation MC to invite further comment.

What’s Next

The proposal seeks public comment and data on a broad range of issues relating to the proposed rule, including the costs and benefits associated with the proposal. Public comments on the proposal and on the previously proposed rules under Regulation MC are due on April 29, 2011. After careful review of comments, the SEC will consider whether or not to adopt or modify the proposed rules.



Modified: 03/02/2011