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Enhancing the Stability and Safety of Clearing Agencies

Commissioner Luis A. Aguilar

March 12, 2014

About 40 years ago, Congress gave the Commission the statutory authority to facilitate the establishment of a national system for clearing and settling securities transactions.[1] With this authority, the Commission passed rules and adopted an infrastructure to register and regulate clearing agencies.[2] Today, clearing agencies play a vital role in the structural framework of the global capital markets.

Because clearing agencies have such a vital role, Congress determined that they would be instrumental in providing transparency in the derivatives market. Specifically, the recent financial crisis compelled the Commission to develop a comprehensive regulatory framework for the oversight of the derivatives market. In December 2008, shortly after the crisis came to full swing, the Commission adopted temporary, conditional rules to facilitate the central clearing of credit default swaps.[3] In 2010, the Dodd-Frank Act[4] provided the Commission with the regulatory authority to propose and adopt rules that would require transactions in security-based swaps to be cleared through a clearing agency registered with the Commission.[5] This is important because the derivatives market has historically operated in an opaque market[6] replete with regulatory gaps.[7]

As a result of the Dodd-Frank Act, we should expect significant increases in the central clearing of derivatives, a market that is estimated to be about $693 trillion worldwide.[8] To give you a sense of the magnitude of what clearing agencies have been handling, in 2012, registered clearing agencies processed more than $2 quadrillion in financial market transactions.[9] As more and more securities transactions become centrally cleared and settled, clearing agencies will be instrumental in reducing counterparty risks—through the multilateral netting of trades—and they will be an important component to increasing market-wide financial stability.

It is important to note that while clearing agencies can help reduce systemic risks, the growth in the transactions that they will handle can result in other types of risks becoming more concentrated at clearing agencies. These risks include credit or counterparty default risk, market risk, and liquidity risk.[10] Thus, the collapse of a clearing agency can pose substantial, contagion risks to the global financial system.

Due to the importance of clearing agencies and the requirements of the Dodd-Frank Act, in October 2012, the Commission adopted rules that established standards to improve the clearing agencies’ management of counterparty risks and reduction of outstanding credit exposures.[11] That rulemaking was also part of a broader effort to address the systemic risks that became apparent during the financial crisis, such as the potential default of the largest market participants in a clearing agency over a short time period and the cascading effect on the viability of other market participants.[12]

In addition to the Commission’s efforts, the Financial Stability Oversight Council (FSOC) has also reviewed the activities of clearing agencies. In 2012, based in part on the aggregate monetary value of transactions that clearing agencies processed, and their aggregate exposures to their counterparties, FSOC determined that certain clearing agencies were deemed systemically important.[13]

Today, the Commission considers additional rules that would establish higher standards for the governance and operation of Covered Clearing Agencies, which are registered clearing agencies that have been, among other things, designated as systemically important and/or provide central counterparty services for security-based swap transactions.[14] These new rules are intended to prevent regulatory arbitrage, reduce opportunities for unfair competition, mitigate systemic risks, and provide the much-needed transparency, accountability, and protection for our capital markets. Specifically, the proposed rules 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.[15] These proposed requirements are expected to result in consistent, higher risk management standards.[16]

In particular, the proposed release 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.[17] Covered Clearing Agencies would need to manage operational risks by, among other things, ensuring that their systems have a high degree of security, resiliency, operational reliability, and adequate, scalable capacity.[18] 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.[19] To that end, it is incumbent upon the Commission to adopt a robust Regulation SCI, so market participants will have certainty and finality, and so that our financial infrastructure will have a strong foundation.


Given the crucial role that clearing agencies play in our financial markets, it is important that they be subject to high standards of governance and operation. Today’s rule proposal is a step forward in enhancing the stability and safety of clearing agencies. For these reasons, I will support this proposal.

In closing, I want to thank all of the staff for your efforts and hard work on this rulemaking. In particular, I want to mention Katherine Martin from the Division of Trading and Markets, and Hari Phatak from the Division of Economic and Risk Analysis, for the time that you spent with my office and answering many of my questions about this release.

Thank you.

[1] See Standards for Covered Clearing Agencies, Release No. 34-71699 (Mar. 12, 2014), available at (“Proposed Release”); Proposed Release at I.A. (discussing Section 17A of the Securities Exchange Act of 1934 (“Exchange Act”)).

[2] See Proposed Release at I.A.

[3] In December 2008, the Commission permitted certain entities that performed central counterparty services to clear and settle credit default swaps on a temporary, conditional basis. See Exchange Act Release Nos. 60372 (July 23, 2009), 74 FR 37748 (July 29, 2009), 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010) and 63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010) (ICE Clear Europe Limited); 60373 (July 23, 2009), 74 FR 37740 (July 29, 2009), 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010) and 63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010) (Eurex Clearing AG); 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) and 63388 (Nov. 29, 2010), 75 FR 75522 (Dec. 3, 2010) (Chicago Mercantile Exchange, Inc.); 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), 61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) and 63387 (Nov. 29, 2010), 75 FR 75502 (Dec. 3, 2010) (ICE Trust US LLC); 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (LIFFE A&M and LCH.Clearnet Ltd.).

[4] Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Pub. L. 111-203, § 410 (2010). Title VII of the Dodd-Frank Act expanded the Commission’s authority under the Exchange Act to include activities related to security-based swaps, and Title VIII of the Dodd-Frank Act established an enhanced supervisory and risk control system for systemically important clearing agencies. See Clearing Agency Standards, Exchange Act Release No. 34-68080, at 10 (Oct. 22, 2012), available at

[5] See id.; Proposed Release at I.A.

[6] Frank Partnoy and David A. Skeel Jr., The Promise and Perils of Credit Derivatives, 75 U. Cin. L. Rev. 1019, 1036 (Spring 2007).

[7] James E. Kelly, Transparency and Bank Supervision, 73 Alb. L. Rev. 421, 424 (2010).

[8] See Bank for International Settlements, Statistical Release: OTC Derivatives Statistics at End-June 2013, at 2 (Nov. 2013), available at

[9] See, e.g., CME Group, 2012 Annual Report, at 2, available at (indicating $806 trillion notional in trading volume); Depository Trust & Clearing Corporation, 2012 Annual Report, available at (indicating $1.6 quadrillion in transactions cleared).

[10] See Proposed Release at II.B.4.

[11] See Clearing Agency Standards, Exchange Act Release No. 34-68080 (Oct. 22, 2012), available at; Fact Sheet, SEC Adopts Standards for Risk Management and Operations of Clearing Agencies (Oct. 22, 2012), available at

[12] See Clearing Agency Standards, Exchange Act Release No. 34-68080, p. 61, 241-42 (Oct. 22, 2012), available at

[13] Financial Stability Oversight Council, Appendix A, Designation of Systemically Important Financial Market Utilities (July 18, 2012), available at

[14] “Covered Clearing Agencies” are clearing agencies that (1) have been designated as systemically important by the Financial Stability Oversight Council and for which the Commission is the supervisory agency; (2) provide central counterparty services for security-based swaps or are involved in activities the Commission determines to have a more complex risk profile, where in either case the Commodity Futures Trading Commission is not the supervisory agency for such clearing agency; or (3) are otherwise determined to be covered clearing agencies by the Commission. See Proposed Release.

[15] See Proposed Release at II.A. (discussing proposed Exchange Act Rule 17Ad-22(e)). Proposed Exchange Act Rule 17Ad-22(e) also establishes requirements for covered clearing agencies with respect to general organization, settlement, central securities depository and exchange-of-value settlement systems, general business risk, access, efficiency, and transparency. See id.

[16] See Proposed Release at IV.A. and IV.C.3.

[17] See Proposed Release, Proposed Rule 17Ad-22(e)(17).

[18] Id.

[19] See Proposed Release at II.B.14.; Regulation Systems Compliance and Integrity, Exchange Act Release No. 34-69077 (Mar. 8, 2013), available at

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