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Living Wills for Clearing Agencies

May 17, 2023

In 2010, Congress passed, and President Obama signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law was enacted to overhaul and strengthen oversight of our financial system and to reduce the likelihood of a future 2008-like financial crisis, the worst of its kind since the Great Depression.

A toxic combination of excessive risk taking and lax oversight spawned by deregulation resulted in trillions of dollars in losses in household wealth; hundreds of billions of dollars in taxpayer-funded bailouts; millions of foreclosures; nearly 9 million jobs lost; and a substantial loss of confidence in our markets.

The working families who were the victims of this devastation, yet shouldered the burden of saving the country’s financial system, deserved to be better protected against the financial consequences of a crisis they had no hand in causing.

In response, Congress included a provision in the Dodd-Frank Act requiring large, systemically important banks, and certain other firms, to develop living wills, or resolution plans, for speedy and orderly resolution in the event of a catastrophic failure. The goal of this provision was to stave off financial contagion, preserve financial stability, and avoid massive taxpayer bailouts.

In that same spirit, the Commission is proposing a similar rule for covered clearing agency living wills. In the Dodd-Frank Act, Congress found that the national system for clearance and settlement is important for the “proper functioning of the financial markets.”

The Commission already requires a covered clearing agency’s policies and procedures to include a recovery and wind down plan. However, when originally adopted in 2016, the Commission declined to include specific requirements for these plans, reducing their overall effectiveness.

As noted in the proposal being considered today, central clearing benefits markets by reducing risk and increasing efficiency. It also benefits the financial system as a whole by increasing resiliency and monitoring risk. The failure or disorderly resolution of a clearing agency could create contagion with significant fallout for the broader economy.

By requiring clearing agencies to develop more robust plans this proposal will promote financial stability, protect investors, and increase market resiliency. I’m pleased to support it.

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