Alert March 18, 2014

SEC Proposes Standards for “Covered Clearing Agencies”

The SEC has proposed standards for “covered clearing agencies,” which would include registered clearing agencies that (i) have been designated as systemically important by the Financial Stability Oversight Council and for which the SEC is the supervisory agency, (ii) provide central counterparty (“CCP”) services for security-based swaps or are involved in activities the SEC determines to have a more complex risk profile, where in either case the CFTC is not the supervisory agency for such clearing agency, or (iii) are otherwise determined to be covered clearing agencies by the SEC.  The SEC proposal would create two tiers of regulations:  the existing rules would apply to registered clearing agencies other than covered clearing agencies, while the newly-proposed rules would impose heightened standards on covered clearing agencies.

The proposed rules would require covered clearing agencies to establish, implement, maintain, and enforce policies and procedures reasonably designed to address certain enumerated areas, such as financial risk management, settlement, default management, access, and efficiency.  Some of the more notable specific proposals include a proposed rule that would require policies and procedures to address holding “qualifying liquid resources” sufficient to withstand the default by a participant and its common control affiliates (together, a “participant family”) that “would generate the largest aggregate payment obligation for the covered clearing agency in extreme but plausible market conditions”; policies and procedures regarding daily stress testing and collecting margin at least daily; and policies and procedures that provide for the covered clearing agency to hold liquid net assets funded by equity equal to at least six months of its current operating expenses to permit it to continue operations and services in the event of significant business losses, whether during a recovery or an orderly wind-down of the covered clearing agency.

Additional proposed rules would govern SEC procedures regarding, among other matters, determining whether a registered clearing agency should be considered a covered clearing agency.

Comments on the proposal will be due 60 days after its forthcoming publication in the Federal Register.