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SEC Adopts Rules On Clearing House Standards

by Glen Shapiro, LawAndTax-News.com, New York

26 October 2012


The Securities and Exchange Commission (SEC) has adopted a rule that establishes standards for how United States registered clearing agencies, which play a critical role in the securities markets by ensuring that transactions settle on time and on the agreed-upon terms, should manage their risks and run their operations.

The rule was adopted in accordance with the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd Frank Act provides the SEC with additional authority to establish standards for clearing agencies, including for those clearing agencies that clear security-based swaps.

A clearing agency generally acts as a middleman between the parties to a transaction and, when acting as a central counterparty, it assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide such benefits as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.

“These new rules are designed to ensure that clearing agencies will be able to fulfil their responsibilities in the multi-trillion dollar derivatives market, as well as more traditional securities markets,” said SEC Chairman Mary L. Schapiro. “They’re part of a broader effort to put in place an entirely new regulatory regime intended to mitigate systemic risks that emerged during the financial crisis.”

The new rules would require registered clearing agencies that provide central counterparty services to maintain certain standards with respect to risk management and operations.

Under the final rule, a registered clearing agency that performs central counterparty services is required to establish, implement, maintain and enforce written policies and procedures reasonably designed to measure its credit exposures to its participants at least once a day; and use margin requirements to limit its credit exposures to participants using risk-based models and parameters, to be reviewed at least monthly.

It would also need, for example, to maintain sufficient financial resources to withstand, at a minimum, a default by the participant group to which it has the largest exposure in extreme but plausible market conditions; and to calculate and maintain a record of the financial resources that would be needed in the event of a participant default. Clearing agencies must perform the calculation quarterly, or at any time upon the SEC’s request.

The new rules, which also establish recordkeeping and financial disclosure requirements for all those agencies, will become effective 60 days after the date of publication in the Federal Register.

TAGS: investment | law | financial services | capital markets | United States | standards | regulation | alternative investment | services

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