SEC Establishes Risk Management and Operations Standards for Registered Clearing Agencies

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The Securities and Exchange Commission adopted new rule 17Ad-22 under the Securities Exchange Act of 1934 (the Exchange Act) that establishes minimum requirements regarding how registered clearing agencies that provide central counterparty services (Clearing Agencies) must maintain effective risk management procedures and controls as well as meet the statutory requirements under the Exchange Act on an ongoing basis.

Generally, the rule requires a Clearing Agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to (i) measure its credit exposures to its participants at least once a day; (ii) use margin requirements to limit its credit exposures to participants using risk-based models and parameters, to be reviewed at least monthly; (iii) maintain sufficient financial resources to withstand, at a minimum, a default by the participant family to which it has the largest exposure in extreme but plausible market conditions (and a default by the two participant families to which it has the largest exposures for security-based swap clearing agencies); and (iv) provide for an annual model validation by a qualified person who is free of influence from the persons responsible for the development or operation of the models being validated.

The rule also provides membership standards for central counterparties. Under the rule, a Clearing Agency is required to establish, implement, maintain and enforce written policies and procedures reasonably designed to (i) provide the opportunity to obtain membership in the clearing agency for persons who are not dealers or security-based swap dealers on fair and reasonable terms; (ii) have membership standards that do not require participants to maintain minimum size portfolios or minimum transaction volumes; and (iii) provide a person that maintains net capital equal to or greater than $50 million with the ability to obtain membership provided that the person is able to comply with other reasonable membership standards, with net capital requirements being scalable in relation to the risks posed by such person’s activities to the clearing agency.

In addition, the rule requires a Clearing Agency to (i) calculate quarterly or upon SEC request, and maintain a record of, the financial resources that would be needed in the event of a participant default; and (ii) post on its website its annual audited financial statements within 60 days after the end of its fiscal year. The rule also establishes several new operational standards for Clearing Agencies.

The rule will become effective 60 days after its publication in the Federal Register.

Click here to read the SEC’s Adopting Release for Rule 17Ad-22.

 

Published In: Administrative Agency Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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