The SEC has recently announced proposed rule changes aimed at strengthening the resilience and recovery capabilities of covered clearing agencies. These changes are designed to ensure the continuity of clearing services during times of significant stress and improve the overall risk management framework in the capital markets.
Improving Intraday Margin Monitoring
One of the key aspects of the proposed rule changes is the requirement for covered clearing agencies to establish policies and procedures for a risk-based margin system that actively monitors intraday exposure. This system would have the necessary authority and operational capacity to make intraday margin calls whenever circumstances warrant it. The goal is to respond promptly and effectively to breaches of risk thresholds or instances of elevated volatility in the products cleared or markets served by the agency.
By implementing an intraday margin monitoring system, clearing agencies can better mitigate risk and ensure the smooth functioning of the markets, benefiting investors, issuers, and the overall market infrastructure.
Addressing the Use of Substantive Inputs
The proposal also focuses on the use of substantive inputs in a covered clearing agency’s risk-based margin system. Specifically, it aims to establish policies and procedures that address situations where such inputs are not readily available or reliable. This requirement underscores the importance of having alternative approaches or fallback options to maintain the integrity and effectiveness of the margin system.
By incorporating measures to deal with the unavailability or unreliability of substantive inputs, covered clearing agencies can ensure a robust risk management framework even in challenging circumstances.
Enhancing Recovery and Wind-Down Planning
In addition to the changes mentioned above, the proposed rule includes a new requirement for covered clearing agencies to have a comprehensive recovery and wind-down plan. This plan would consist of nine specific elements, building upon the existing requirement for such a plan. The goal is to ensure that clearing agencies are well-prepared to navigate potential disruptions or crises and can take appropriate actions to recover and wind down their operations in an orderly manner.
The inclusion of these nine elements in the recovery and wind-down plan will provide greater clarity and guidance for covered clearing agencies, enabling them to proactively address risks and challenges and minimize the impact on the broader financial system.
SEC Chair’s Support for the Proposal
SEC Chair Gary Gensler has expressed his support for the proposed rule changes, emphasizing the importance of resilient and well-regulated clearinghouses in reducing risk for the public. He believes that if adopted, these changes will enhance the resiliency of the market plumbing, which is essential for the smooth operation of the capital markets. Ultimately, these enhancements will benefit investors, issuers, and the markets as a whole.
Public Comment Period
As part of the regulatory process, the SEC has opened a public comment period for stakeholders and interested parties to provide feedback on the proposed rule changes. The comment period will be open for either 60 days following the release publication on the SEC website or 30 days following publication in the Federal Register, whichever period is longer. This allows for thorough consideration of the proposed changes and ensures that the final rules reflect a wide range of perspectives and expertise.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.