April 1, 2014
The definition for a clearing agency with "a more complex risk profile" is too vague.
The test that this new rule will create is:
"In determining whether a clearing agency's activity has a more complex risk profile, the Commission may consider:
(i) characteristics such as the clearing of financial instruments that are characterized by discrete
jump-to-default price changes or that are highly correlated with potential participant defaults, and
(ii) such other characteristics as it deems appropriate in the circumstances."
The proposed wording is vague. It is unclear whether criteria (i) and (ii) are intended to be evaluated together, as the two elements of a clearing agency with a "complex risk profile," or whether (i) and (ii) are two separate sets of analysis by which a clearing agency may be judged.
If they are construed to be two elements, then:
First, a clearing agency must be found to be "characterized by discrete jump-to-default price changes or ... highly correlated with potential participant defaults."
Second, a finding of "other characteristics" that indicate a complex risk profile would be required. If this is the case, then some factors for evaluating the "other characteristics should be included in the rule.
If on the other hand, criteria (i) and (ii) are met to be two alternative criteria for analysis, with either one of them being enough to find that a clearing agency has a "complex risk profile" and is therefore subject to a higher level of regulation, then the second test (ii) is so broad that a clearing agencies would have no way to know whether this rule applies to them until after an enforcement action has commenced.
The SEC guidelines for determining which clearing agencies will be considered as having a "complex risk profile" should be clear and understandable. I suggest that the test be re-drafted to make clear whether criteria (i) and (ii) are meant to be considered together or as alternative, and also to include what factors should be considered for criteria (ii) analysis.