The SEC wants better "living wills" for clearing agencies that tank during a crisis.
Grygo is the chief content officer for FTF & FTF News.
Late last week, the SEC announced that it is proposing big changes for covered clearing agencies (CCAs) that “would augment and strengthen the requirements of the rules that govern CCAs.”
When translated from the legal gobbledygook, the SEC really wants better “living wills” a.k.a. “recovery and orderly wind-down plans (RWP)” for clearing agencies that may need to wind down quickly (often as the result of a crisis).
Given the volatility of global markets, a pending recession, rising interest rates, and an ongoing European war, the SEC thought it best to have clearing firms improve their exit plans so that investor confidence is not threatened.
And, just in case you were wondering, the new rules, once fully adopted, apply to “registered clearing agencies that act as a central counterparty, meaning that they act as the buyer to every seller and the seller to every buyer in a securities transaction, or as a central securities depository, meaning that they act as a custodian of securities in connection with a central system,” according to the SEC.
For the CCAs, the new rules will likely result in new policies and procedures intended to “improve resilience and recovery.”
In particular, the proposal would require a CCA to have:
- “Policies and procedures to establish a risk-based margin system that monitors intraday exposures on an ongoing basis and includes the authority and capacity to make intraday margin calls as frequently as circumstances warrant;”
- “Policies and procedures to establish a risk-based margin system” focused on “the use of substantive inputs, in addition to price data, in its risk-based margin system, including when such inputs are not readily available or reliable;” and
- RWPs must “include specific elements to ensure that the RWP is fit for purpose and provides sufficient identification of how a CCA would operate in a recovery and how it would achieve an orderly wind-down.”
The SEC is more than revamping the planning process for any wind-downs — it is adding nine elements to the recovery and wind-down planning rules already in place.
Among the nine new elements, two seem very important: the continuation of services and the identification of those relevant service providers:
- “Identify and describe the CCA’s critical payment, clearing, and settlement services and address how it would continue to provide such services in the event of recovery and during an orderly wind-down, including the identification of the staffing necessary to support such services and analysis of how such staffing would continue in the event of a recovery and during an orderly wind-down;” and
- “Identify and describe any service providers upon which the CCA relies to provide its identified critical services, specify to what critical services such service providers are relevant, and address how the CCA would ensure that such service providers would continue to provide such services in a recovery and orderly wind-down, including consideration of contractual obligations with such service providers and whether those obligations are subject to alteration or termination as a result of the initiation of the RWP.”
To help people avoid gobbledygook, the SEC has compiled a two-page fact sheet that can be found here: https://www.sec.gov/files/34-97516-fact-sheet.pdf
And, for the brave, the full, 130-page document of the new rules can be found here: https://bit.ly/45y4nIK
Lastly, the SEC is seeking feedback: “The public comment period will remain open for 60 days following publication of the proposing release on the SEC website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.”
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