Alert October 30, 2012

SEC Adopts Standards for Risk Management and Operations of Clearing Agencies

The SEC approved a final rule that establishes standards applicable to clearing agencies, including those that clear security-based swaps.  New Rule 17Ad-22 under the Securities Exchange Act of 1934 establishes minimum requirements for risk management procedures and controls to be maintained by registered clearing agencies.

Operations and Risk Management Practices.  The Rule requires registered clearing agencies that perform central counterparty services to publish, implement, and enforce written policies and procedures designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.  The rules require standards with respect to (a) the measurement and management of credit exposures, (b) margin requirements, (c) financial resources (requiring registered clearing agencies that perform central counterparty services to maintain sufficient financial resources to withstand a default by the participant, or the two participants in the case of a security-based swap clearing agency, to which it has the largest exposure “in extreme but plausible market conditions”), and (d) an annual model validation process. 

Central Counterparty Services.  The Rule requires a registered clearing agency that serves as a central counterparty to:  (a) provide the opportunity for a person who does not perform any dealer or security-based swap dealer services to obtain membership in order to clear securities for itself or on behalf of other persons; (b) refrain from using minimum portfolio size and minimum transaction volume thresholds as conditions to membership; and (c) provide the ability to obtain membership to persons who maintain net capital equal to or greater than $50 million (with higher requirements permissible if the central counterparty demonstrates to the SEC that such higher threshold is necessary to mitigate risks that could not be managed by other measures).  The Rule also requires registered clearing agencies that perform central counterparty services to calculate and document compliance with applicable financial resource requirements no less frequently than quarterly.

Disclosure and Other Requirements.  Under the Rule, a registered clearing agency must post its annual audited financial statements on their website.  Finally, the Rule establishes certain minimum standards applicable to each registered clearing agency, in fifteen categories including “custody of assets and investment risk,” “operational risk,” “governance,” “default procedures,” “timing of settlement finality,” and “risk controls to address participants’ failures to settle.”

The Rule becomes effective 60 days after its forthcoming publication in the Federal Register.