Thursday, April 3, 2014

SEC Proposes Rules for Systemically Important and Security-Based Swap Clearing Agencies

Proposal Reserves Great Discretion for the SEC

“Clearing agencies that have been designated as systemically important or that clear security-based swaps are a backbone of the U.S. financial markets. The enhanced regulatory regime proposed today reflects the importance of effective regulation of these entities.” 
---SEC Chairman Mary Jo White 

The Securities and Exchange Commission voted on March 12 to propose new rules to enhance the oversight of clearing agencies that are deemed to be systemically important or that are involved in complex transactions like security-based swaps. The Dodd-Frank Act calls for a new framework of regulation for certain clearing agencies, and these rules, if adopted, would apply to SEC-registered clearing agencies that have been designated as systemically important by the FSOC. The rules would also sweep into their regulatory ambit clearing agencies not deemed systemically important, but that take part in highly complex transactions, such as clearing security-based swaps.

These new rules would subject qualifying clearing agencies to new regulations governing their financial risk management, operations, governance, and disclosure to market participants and the public.  

The SEC’s proposal would create more robust requirements for “covered clearing agencies,” which would include:

  • Clearing agencies designated systemically important by FSOC, for which the SEC acts as the supervisory agency under Title VIII;
  • Clearing agencies that provide central counterparty services for security-based swaps or are otherwise involved in activities with a more complex risk profile, unless they have been designated systemically important by FSOC and their supervisory agency under Title VIII is the CFTC;
  • Clearing agencies that the Commission determine to be covered clearing agencies.  Proposed Rule 17Ab2-2 would provide a framework for making such determinations.

The proposal would also create a two-tiered system of regulations to provide flexibility for some new entrants into the clearing market, while still allowing the SEC to apply these new enhanced regulations and oversight to larger and more established clearing agencies.

It is notable that application of these proposed rules to a given clearing agency is not entirely reliant upon the FSOC's determination that the clearing agency is systemically important.  Rather, the rule, if adopted, would give the SEC full discretion as to whether the enhanced regulations and restrictions should apply.  

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