On May 17, the SEC announced proposed rule amendments that would strengthen the resilience as well as the recovery and wind-down plans (RWPs) of covered clearing agencies (CCAs) under the Securities Exchange Act of 1934. The revisions would update both the current rules concerning intraday margin and the use of substantive inputs to a CCA’s risk-based margin system. The proposed rules are now open for public comment.
If adopted, the rule would benefit investors, issuers, and the markets by:
- requiring a CCA to have policies and procedures to establish a risk-based margin system that monitors intraday exposure on an ongoing basis. This includes the authority and operational capacity to make intraday margin calls as often as circumstances warrant (including when risk thresholds specified by the CCA are breached or when the products cleared or markets served display elevated volatility).
- requiring a CCA to have policies and procedures to establish a risk-based margin system that address the use of substantive inputs to its risk-based margin system when such inputs are not readily available or reliable.
Also included in the proposal is a new rule that would build upon the current requirement that a CCA have an RWP. The proposal would require a CCA to specify the following nine elements that a CCA would be required to include in its RWP:
- identify and describe the CCA’s critical payment, clearing, and settlement services and address how it would continue to provide services in the event of recovery. During an orderly wind-down, this includes identification of the staffing necessary to support such services and analysis of how such staffing would continue in the event of a recovery and during an orderly wind-down
- identify and describe any service providers that the CCA relies on to provide its identified critical services, specify which service providers are relevant, and address how the CCA would ensure that such service providers would continue to provide these services in a recovery and orderly wind-down, including consideration of contractual obligations with such service providers and whether those obligations are subject to alteration or termination as a result of the initiation of the RWP
- identify and describe criteria that could trigger the RWP’s implementation and the process that the CCA uses to monitor and determine whether the criteria have been met, including the applicable governance arrangements
- identify and describe the rules, policies, procedures, and any other tools the CCA would use in a recovery or orderly wind-down
- identify and describe scenarios that may potentially prevent the CCA from being able to provide its critical services, including as arising from uncovered credit losses, uncovered liquidity shortfalls, and general business losses
- include procedures for review of the plans by the board of directors at least every 12 months or following material changes that would significantly affect the RWPs’ viability or execution, with such review informed, as appropriate, by the RWP testing
- include procedures for testing the CCA’s ability to implement the RWPs at least every 12 months, including by requiring its participants and, when possible, other stakeholders to participate in testing its plans, providing for reporting the testing results to its board of directors and senior management, and specifying the procedures for amending the plans to address the testing results
- include procedures for informing the SEC as soon as possible when the CCA is considering initiating a recovery or orderly wind-down
- address how the identified rules, policies, procedures, and any other tools or resources would ensure timely implementation of the RWPs
Interested parties may submit feedback during the public comment period, which will remain open until July 17, 2023 or 30 days following the proposal’s publication in the Federal Register, whichever period is longer. For more information, including instruction on how to submit comments, refer to the Covered Clearing Agency Resilience and Recovery and Wind-Down Plan proposed rule on sec.gov.
SEC Proposes Rule Amendments and New Rule to Improve Risk Management and Resilience of Covered Clearing Agencies (sec.gov)