SEC Adopts Standards for Risk Management and the Operations of Clearing Agencies (Final Rule; Pre-Fed. Reg. Version)
The SEC is adopting new Rule 17Ad-22 in accordance with Section 17A of the Exchange Act, Section 763 of Title VII ("Title VII") of the Dodd-Frank Act, and Section 805 of Title VIII ("Title VIII") of the Dodd-Frank Act. Rule 17Ad-22 establishes minimum requirements regarding how registered 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. The rule is NOT limited to firms that clear security-based swaps ("swaps"); it applies to all SEC-registered clearing agencies, although there are certain special requirements that apply to clearing firms for swaps.
While much of the Rule is focused on the technicalities of risk management, there is also extensive discussion of policy issues, such as the extent to which the SEC should impose fixed standards on clearing agencies as opposed to allowing the clearing agencies a greater degree of discretion subject to SEC oversight.
On the issue of the strength of clearing corporations, the Rule requires that an ordinary clearing corporation have resources sufficient to sustain the default of its largest participant, but that a swaps clearing organization have resources sufficient to cover a default by its two largest participants.
On the issue of membership, the Rule prohibits requiring that a member act as a dealer or swap dealer or requiring that a member meet any volume limits. It also generally requires that persons be eligible for membership if they maintain "net capital" (as generally defined in the broker-dealer rules) of $50 million, but that firms with lower net capital amounts may be limited in the amount or type of business that they do. The SEC specifically says that it wishes to facilitate the opportunity for non-dealers to become members so as to clear for themselves or others.
The Rule mandates a substantial degree of transparency by the clearing organization to market participants.
The Rule requires that clearing agencies establish procedures that are reasonably designed to be cost-effective -- an interesting requirement to impose at a time when the SEC and the CFTC are under so much pressure to conduct cost-benefit tests of their new rules.
Effective Date: 60 days after date of publication in the Federal Register.
View final rule here (links externally to SEC website). See also: Press Release.