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Statement on Covered Clearing Agency Resilience and Recovery and Wind-Down Plans

May 17, 2023

Thank you, Chair Gensler. In Section 17A of the Securities Exchange Act of 1934 (“Exchange Act”), Congress determined that “the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.”[1]  Congress thus directed the Commission “to facilitate the establishment of a national system for clearance and settlement of transactions in securities.”[2]  In doing so, Congress also directed the Commission to have “due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition”.[3]  The proposal before the Commission today would change the covered clearing agency rules promulgated under the Exchange Act.[4]

Developing appropriate standards for covered clearing agencies is neither easy nor obvious.  Overall, clearing can reduce certain risks, and, most particularly, the risk of counterparty default for those trading on a market.  Another benefit is more efficient netting of required margin.  In turn, these efficiencies and risk mitigation can serve to facilitate liquidity and price discovery.  Yet, an unintended consequence of such clearing services can be a centralization of other risks associated with the possible failure of the clearing agency itself, as it steps in and acts as buyer to the sellers, and seller to the buyers. 

Also challenging from a regulatory perspective is the fact that there can be problematic shifts in incentives among market participants through the mutualization of certain risks and costs; for example, risk taking may be encouraged “by subsidizing and mutualizing default losses”, and the “shifting private costs of monitoring to the clearing house” may “allow members to underinvest in due diligence”.[5]  When addressing the resilience, recovery and wind-down plans of clearing agencies, which are sometimes referred to as RWPs, these potential effects and moral hazards must be kept at the forefront of our thinking.  Whether the Commission has done a good job in striking the needed balance in this arena for the proposal before us today is the question that needs to be answered.  The comment process will be vital to the Commission in order to determine whether there are unintended consequences associated with this proposal.    

Much of today’s proposal entails a codification of a number of the practices currently being employed.  Previously, the Commission has required that covered clearing agencies simply have RWPs, but there were not specific requirements in terms of content.  The Commission is now proposing specific requirements as to content, designed to reflect the collective experience thus far.  The new rule would specify nine elements that a covered clearing agency would be required to include in its RWP.  That being said, the Commission, in other contexts, has often warned that past performance should not be indicative of future results.  Thus, an important concern is whether today’s specific proposal will be tomorrow’s outdated rule.  One only needs to recall the effort to mandate the-then state of the art “write-once, read-many” (WORM) optical storage media, more commonly known as CD technology, which was mandated by the Commission for broker-dealer record keeping until last year.

The proposed rule would have covered clearing agencies maintain strong intraday margin capabilities by requiring that they have risk-based margin systems that can monitor intraday exposure on a continuous basis and have the capacity to make intraday margin calls as frequently as warranted by circumstances. 

In preparation for a situation where substantive inputs to the covered clearing agency’s risk-based margin system are not readily available or reliable, the proposed rule would require that procedures are in place that would provide for inputs from alternative sources, or make use of an alternative risk-based margin system that does not relay on the unreliable or unavailable inputs.

All-in-all, given the changes in intraday volume and volatility across time, these proposals are appropriate to put forward for review by the public.  I look forward to the vital contributions of the comment process in helping to ensure that we get these nuanced policy trade-offs right.  I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts.

[1] Section 17A(a)(1)(D) of the Exchange Act.

[2] Section 17A(a)(2)(A)(i) of the Exchange Act.

[3] Section 17A(a)(2)(A) of the Exchange Act.

[4] See, Covered Clearing Agency Resilience and Recovery and Wind-Down Plans, Release No. 34-97516, (May 17, 2023), available at

[5] See, Yesha Yadav, The Problematic Case of Clearinghouses in Complex Markets, 101 Georgetown Law Journal 387 (2013).

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