Good morning, Chair Gensler and Commissioners. Today, the Commission is proposing to strengthen resiliency standards of covered clearing agencies through a new rule and new amendments.
Covered clearing agencies are an essential part of the infrastructure of financial markets. They govern the process through which trades are cleared – namely prepared for settlement of cash and securities. Without proper functioning of clearing agencies, trust in the basic functioning of financial markets would be called into question.
This rule pertains to recovery and wind-down. Recovery is the process by which a covered clearing agency maintains its ability to perform critical services, should losses render it insolvent. Wind-down is the process by which services would be transferred to another entity – presumably an unlikely event in the case of a clearinghouse. The proposed rule adds specificity to already-required plans for recovery and wind-down, for example, that the covered clearing agency have procedures for testing plans and for board reviews. We expect that this would reduce the risk of an unsuccessful recovery that may spill over to other parts of the market, potentially contributing to a major market disruption.
The Commission is also considering proposing amendments to existing rules governing the determination of margin. Should a market participant fail to perform on a financial contract, the clearinghouse must stand in its stead. Thus the clearinghouse is exposed to the failure of market participants. To protect itself, the clearinghouse collects extra cash and securities from all market participants. The risk of failure may not be uniform, and may change even within the day. The proposed amendments would require that the clearing agency mark positions to market at least daily, monitor risk on an ongoing basis, and have the capability to collect margin depending on changes in market conditions, such as volatility, or changes in clearinghouse conditions, such as a breach of risk capacity.
These changes involve unfettered access to data. The rule requires redundancy around pricing and other data inputs. These changes should promote the functioning of the clearinghouse during times of systemic disruption, ultimately enabling more reliable transfer of risk and promoting capital formation.
This proposal aims to promote the resiliency of covered clearing agencies. While in some ways it reflects current market practice, in others it raises standards. Because we believe that market forces, including those governing the market for clearing, may lead to underinvestment in resiliency, regulation will have the benefit of better outcomes for market participants.
Generally, we estimate small compliance costs in this proposed rule and amendments.
In closing, I thank our colleagues from the Division of Trading and Markets, the Office of the General Counsel, and others for their collaboration, and I thank all of you today for your attention.