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U.S. Securities and Exchange Commission

Clearing and Settlement

Background: Any clearing agency that clears or settles securities transactions is required to register with the SEC under section 17A of the Securities Exchange Act of 1934. On July 16, 2011, several organizations that were performing clearing agency services for credit default swap transactions under SEC exemptive relief from registration became newly registered clearing agencies pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Credit default swap clearing agencies have a conditional exemption from registration.

Title VIII of the Dodd-Frank Act gives the Board of Governors of the Federal Reserve new authority with respect to the risk management of clearing agencies designated as systemically important; and designated payment, clearing and settlement activities conducted by financial institutions. In addition, the Financial Stability Oversight Council (FSOC), pursuant to procedures set forth in Title VIII, may designate clearing agencies and payment, clearing and settlement activities as systemically important.

Title VIII authorizes the SEC, in consultation with the Fed and FSOC, to prescribe new risk management standards for SEC clearing agencies and financial institutions. In the case of a clearing agency that is regulated by the SEC and is regulated by the Commodity Futures Trading Commission (CFTC) as a derivatives clearing organization (DCO), only one will be the “Supervisory Agency” authorized to prescribe and implement the enhanced risk management standards under Title VIII. The Dodd-Frank Act directs the SEC and CFTC to determine which agency is the “Supervisory Agency” for each clearing agency; if the agencies are unable to agree, the FSOC has the authority to determine.

The Fed may review the SEC’s prudential requirements for clearing agencies and for financial institutions conducting payment, clearing and settlement activities. If the Fed determines that the SEC’s prudential requirements are insufficient, it may formally recommend new risk management standards for the SEC to adopt. If the SEC disagrees with any such recommendation, the FSOC – by a two-thirds vote – may require the SEC to adopt the new standards recommended by the Fed.

Implementation: On March 3, 2011, the Commission proposed certain enhanced requirements for clearing agencies. The proposed rules would require clearing agencies to maintain certain standards with respect to risk management and operations, have adequate safeguards and procedures to protect the confidentiality of trading information, have procedures that identify and address conflicts of interest, require minimum governance standards for boards of directors, designate a chief compliance officer, and disseminate pricing and valuation information if the clearing agency performs central counterparty services for security-based swaps. Many of the proposed requirements would apply to all clearing agencies while others would focus on clearing agencies that clear security-based swaps. On Oct. 18, 2012, the Commission adopted a final rule establishing minimum standards for the operation, governance, and risk management practices of registered clearing agencies, including clearing agencies designated as systemically important.

In addition, in June 2012, the Commission adopted a final rule relating to mandatory clearing of security-based swaps that establish a process for clearing agencies to provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing.

On July 1, 2011, the SEC granted temporary exemptive relief from clearing agency registration under Section 17A(b) of the Exchange Act to entities that perform certain clearing services for security-based swaps. To qualify for the temporary exemption from registration, market participants were required to provide identifying information to the SEC about their organization and its activities.

In addition, as directed by Title VIII, the SEC staff worked jointly with the staffs of the CFTC and the Fed over the past year to provide a report to Congress with recommendations regarding risk management supervision of clearing entities designated as systemically important by the FSOC.

In March 2014, the Commission voted to propose rules to enhance the oversight of systemically-important clearing agencies or those that engage in complex transactions, such as security-based swaps.

Modified: 03/14/2014