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Statement of Commissioner Piwowar at Open Meeting Regarding Adoption of Clearing Agency Standards and Proposal of Amendments to Clearing Agency Definitions

Commissioner Michael S. Piwowar

Sept. 28, 2016

Thank you, Chair White.
I want to start by thanking staff for their hard work on these releases that would establish new requirements for risk management, operations, and governance of certain registered clearing agencies and propose amendments to our clearing agency definitions.  Clearing agencies are vital pieces of our market infrastructure, and their role in the financial markets is only increasing.  That is why I want to express my particular appreciation to the staff for the thoughtful way in which they have developed these requirements, which are based on our history of experience regulating clearing agencies, applicable international guidance, and feedback from market participants and other regulators.  This was no easy task, and the quality of these releases is a testament to your efforts.
The topic of clearing agency oversight has been dominated as of late by the Principles for Financial Market Infrastructures (“PFMI”), developed under the auspices of the Committee on Payment and Settlement Systems and International Organization of Securities Commissions.[1]  Around the world, regulators are being pressured to conform to these standards.  It must have been tempting for staff to merely seek to codify the PFMI and then congratulate themselves for a job well done.  This would have been the easy approach, but it would have been the wrong approach.  Simply porting over international standards would have failed to fully account for the agency’s obligation to regulate these entities under the mandates of the Securities Exchange Act of 1934, and ignored the unique perspectives we have gained through years of supervision in this area. 
I support both the adopting and proposing releases we are voting on today because they reflect a staff decision to not take the easy way out.  Rather, they correctly seek to establish effective regulation tailored to the Commission’s unique mandate and experiences, while creating a regulatory structure that is consistent with the PFMI.
The tremendous pressure to align our rules with the PFMI throughout this rulemaking process brought to my mind another situation in which the Commission acted based on pressures from international prudential regulators.  In 2004, the Commission adopted rule amendments to the broker-dealer net capital rule that established the consolidated supervised entity (“CSE”) program.[2]  This program was  implemented in response to international developments in prudential regulation.  As a result of these developments, affiliates of certain U.S. broker-dealers that conducted business in the European Union (“EU”) needed to demonstrate that they were subject to consolidated supervision at the ultimate holding company level that was “equivalent” to EU consolidated supervision.[3]  The CSE program was intended to meet that standard.
The Commission’s faithful implementation of the CSE program, however, could not compensate for the  fundamental flaws in the international prudential regulatory framework – the so-called “Basel Accord” –  that led to the global financial crisis.  In the aftermath of the financial crisis, the same prudential regulators who pressured the Commission into submitting to the “Basel Accord” spread a variety of false narratives blaming the CSE program for the financial crisis rather than acknowledging their own failures.[4]
Like the CSE program, the Commission has once again been called upon by the international regulatory community to implement new regulations aimed at addressing risks in the financial system, this time related to clearing agencies and other financial market infrastructures.  And again, we have acted in a manner consistent with those standards, as have the Commodity Futures Trading Commission (“CFTC”) and Federal Reserve.  I can only hope that history will not repeat itself and we will not once again be left defending a regulatory system that was doomed from the start.
I have said many times that the current state of central counterparty clearing agency (“CCP”) regulation is one of the things that keeps me awake at night.  To be clear, that is not because I question the abilities of our staff at the Commission, or the usefulness of the enhanced rules in today’s releases.  I know that we have an incredible team of people working day and night to supervise these entities, and I credit staff for their careful consideration of how our new rules can best address risks to the clearing system.  Unfortunately, I am concerned that our best supervisory programs cannot overcome bad policy decisions. 
In early discussions surrounding post-crisis financial reform, Dodd-Frank Act policy-makers settled on CCPs as a near-miraculous way to address risk in the financial system.  For example, former CFTC Chairman Gary Gensler said “By guaranteeing the performance of contracts submitted for clearing, the clearing process significantly reduces systemic risks.”[5]  Soon policy-makers began to view these long-standing cogs in the market infrastructure as giant black boxes that took in risk, and then poof, magically eliminated it from the system.  With this simplistic view of the markets in hand, policy-makers then determined that the most effective way to address risks in the system was to cram as many transactions as possible into CCPs via the Dodd-Frank Act’s extensive clearing mandate.  For example, former Treasury Secretary Tim Geithner said “We will force all standardized OTC derivative contracts to be cleared through appropriately designed central counterparties.”[6] [Emphasis added.]  Thus, in an effort to reduce risk to the financial system, Dodd-Frank Act policy-makers jammed more and more increasingly risky and complex financial products into these critical infrastructures. 
Not surprisingly, it did not take long for market participants and regulators alike to recognize that in their efforts to reduce systemic risk, the Dodd-Frank Act did the exact opposite.  It created an entirely new class of too-big-to-fail entities with the power to bring down the entire financial system.  This fact is openly acknowledged in the two releases we are voting on today, and is never far from my mind when I consider the Commission’s uphill battle to oversee CCPs operating under ill-conceived government clearing mandates. 
While I believe that staff has done an admirable job setting up a principles-based framework for CCPs to manage these risks to the best of their ability, I still fear that ultimately these entities, and the international norms designed to mitigate their risks, will not be able to account for the short-sighted effort by those in Congress and the regulatory agencies that sought to cram as much risk as they could into these entities.
I support today’s adopting and proposing releases as the best approach we currently have at setting heightened standards for the clearing agencies we regulate.  However, this entire effort has the eerie feeling of re-arranging deck chairs on the Titanic.  I hope that history will prove me wrong, but I fear that the Dodd-Frank Act has created too many icebergs for our financial system to safely navigate.
Thank you.  I have no questions.
[1] See Committee on Payment and Settlement Systems and International Organization of Securities Commissions, Principles for Financial Market Infrastructures (Apr. 2012), available at
[2] See Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities, Securities Exchange Act Rel. No. 34-49830 (June 8, 2004), available at
[3] See Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002, available at
[4] See Speech by SEC Staff: Remarks at the National Economists Club: Securities Markets and Regulatory Reform, Erik Sirri (Apr. 9, 2009), available at and Andrew W. Lo, Reading about the Financial Crisis: A Twenty-One Book Review, Journal of Economic Literature, 50(1): 151-
[5] Testimony of Chairman Gary Gensler, Commodity Futures Trading Commission Before the House Committee on Financial Services (Oct. 7, 2009), available at
[6] Testimony of Treasury Secretary Tim Geithner Before the House Financial Services Committee (Mar. 26, 2009), available at
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