SEC Adopts New Rules to Strengthen Risk Management and Resilience of Covered Clearing Agencies
The U.S. Securities and Exchange Commission (SEC) has adopted key rule amendments and introduced a new rule aimed at enhancing the resilience and risk management practices of covered clearing agencies. These measures are designed to bolster the stability of the financial system by mandating intraday margin collection, ensuring the reliability of risk-based margin model inputs, and formalizing recovery and wind-down planning protocols.
Enhancing Intraday Margin Collection
A core feature of the new amendments is the requirement for covered clearing agencies that act as central counterparties (CCPs) to maintain a risk-based margin system with robust intraday margin collection capabilities. The SEC’s amendments mandate that these agencies:
Monitor intraday exposures on an ongoing basis, ensuring they have the capacity to assess and act on intraday risk fluctuations.
Implement intraday margin calls as frequently as necessary to align with changing market conditions, particularly in cases of heightened volatility or breaches of established risk thresholds.
Document instances where an intraday margin call is not made according to the agency’s established policies, providing transparency into margin decision-making processes.
These intraday margin requirements are intended to help clearing agencies manage credit risk in real-time, limiting potential exposure to defaults and enhancing systemic stability.
Strengthening Reliability of Margin Model Inputs
The SEC has also imposed new standards regarding substantive inputs for risk-based margin models, which are essential for a clearing agency’s ability to meet its credit exposures. Under these amendments, covered clearing agencies are required to:
Source substantive inputs reliably for their margin models and implement contingency measures if such inputs become unavailable or unreliable.
Develop fallback procedures, such as utilizing alternative data sources or risk models, to ensure the margin system can remain operational and accurate in meeting credit exposures.
These amendments ensure that clearing agencies are not overly reliant on any single data source, promoting flexibility and resilience in the face of data disruptions.
New Requirements for Recovery and Wind-Down Plans
The new rule further strengthens existing requirements by specifying nine critical elements for recovery and wind-down plans that each covered clearing agency must implement. The SEC has outlined the following aspects to be addressed:
Scenario Planning and Triggers: Agencies must identify potential adverse scenarios and define specific triggers that would initiate recovery or wind-down procedures.
Recovery Tools: Identification of tools and resources necessary to recover from financial distress.
Implementation and Timing: Detailed protocols for the timing and execution of recovery and wind-down actions.
Testing and Approval: Rigorous testing of the plans, along with regular board review and approval, to ensure efficacy.
This structured approach to recovery and wind-down plans is meant to ensure that agencies are prepared to maintain their essential functions and mitigate risks to the broader financial system during periods of instability.
Compliance Dates and Implications for Financial Firms
The SEC has established two key compliance dates for covered clearing agencies:
150 days after publication in the Federal Register for filing any necessary rule changes or advance notices.
390 days after publication for these proposed rule changes and notices to take effect.
Our Firm’s Role in Assisting with Compliance
At Anderson P.C., we understand that compliance with these new requirements will demand rigorous adjustments to risk management frameworks and operational protocols. Our team specializes in navigating regulatory changes, including those that impact clearing agencies and financial institutions more broadly. We are prepared to assist your firm in understanding these new rules, developing robust margin and risk management practices, and implementing comprehensive recovery and wind-down plans.
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