The rule was adopted in accordance with the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd Frank Act provides the SEC with additional authority to establish standards for clearing agencies, including for those clearing agencies that clear security-based swaps.

"These new rules are designed to ensure that clearing agencies will be able to fulfill their responsibilities in the multi-trillion dollar derivatives market as well as more traditional securities markets," said SEC Chairman Mary L. Schapiro. "They're part of a broader effort to put in place an entirely new regulatory regime intended to mitigate systemic risks that emerged during the financial crisis."

The new rule would require registered clearing agencies that provide central counterparty services to maintain certain standards with respect to risk management and operations. Among other things, the rules would set standards with respect to measurement and management of credit exposures, margin requirements, financial resources and margin model validation. The rule also establishes certain recordkeeping and financial disclosure requirements for all registered clearing agencies as well as several new operational standards for these entities.

The new rule 17Ad-22 will become effective 60 days after the date of publication in the Federal Register.

An SEC webpage — http://www.sec.gov/swaps-chart/swaps-chart.shtml — depicts the regulatory regime for security-based swaps and details what happens as a transaction occurs.

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FACT SHEET
Background

A clearing agency generally acts as a middleman between the parties to a transaction, and when acting as a central counterparty it assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide such benefits as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.

Betting of trades.

Bthrough multilateral netting of trades.

Because of the integral role that clearing agencies play in the securities markets, Congress directed the SEC to oversee these entities.

Under Section 17A of the Securities Exchange Act, the SEC already has authority to write rules governing clearing agencies. The Dodd-Frank Act enhanced the SEC's authority to adopt rules addressing risk management standards for clearing agencies that are systemically important. The Dodd-Frank Act also amended the Securities Exchange Act to grant the SEC authority to write rules governing those who are registered as clearing agencies for security-based swaps.
Risk Management Standards for Central Counterparties

Under the final rule, a registered clearing agency that performs central counterparty services is required to establish, implement, maintain and enforce written policies and procedures reasonably designed to:

Measure its credit exposures to its participants at least once a day.
Use margin requirements to limit its credit exposures to participants using risk-based models and parameters, to be reviewed at least monthly.
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).
Provide for an annual model validation by a qualified person who is free from influence from the persons responsible for the development or operation of the models being validated.

Membership Standards for Central Counterparties

The final rule also requires a registered clearing agency that performs central counterparty services to establish, implement, maintain, and enforce written policies and procedures reasonably designed to:

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.
Have membership standards that do not require participants to maintain a minimum size portfolio or minimum transaction volume.
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.

Recordkeeping and Financial Disclosure by Registered Clearing Agencies

Under the final rule, registered clearing agencies that perform central counterparty services are required to calculate and maintain a record of the financial resources that would be needed in the event of a participant default. Clearing agencies must perform the calculation quarterly or at any time upon the SEC's request.

In addition, the final rule will require each registered clearing agency to post on its website its annual audited financial statements within 60 days after the end of its fiscal year.
Other Standards for Clearance and Settlement Processes

The final rules also require each registered clearing agency to (as applicable):

Have rules and procedures that provide for a well-founded, transparent and enforceable legal framework.
Require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation and publicly disclose the clearing agency's participation requirements.
Hold assets in a manner whereby risk of loss or delay is minimized and assets are invested in instruments with minimal credit, market and liquidity risks.
Identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures.
Employ money settlement arrangements that eliminate or strictly limit settlement bank risks and require funds transfers to the clearing agency to be final when effected.
Be cost-effective in meeting the requirements of participants while maintaining safe and secure operations.
Evaluate risks involved with any link arrangements and ensure they are managed prudently.
Have governance arrangements that are clear and transparent and promote the effectiveness of risk management.
Provide market participants with sufficient information for them to identify and evaluate the risks and costs associated with the clearing agency's services.
Immobilize and dematerialize stock certificates and transfer them by book entry to the greatest extent possible.
Make key aspects of its default procedures publicly available and establish default procedures that ensure timely action to contain losses and liquidity pressures.
Ensure settlement no later than the end of the settlement day and require intraday or real-time finality where necessary to reduce risks.
Eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment.
Institute risk controls to address participants' failure to settle when the clearing agency performs central securities depository services and extends intraday credit.
State to participants the clearing agency's obligations with respect to physical delivery risks and identify and manage associated risks.

What's Next?

The new rule becomes effective 60 days after its publication in the Federal Register.

View the final rule:Download the document now 1.1 mb (PDF File)