On May 17, SEC proposed rule re recovery, wind-down, risk practice.
SEC proposed rule changes to amend intraday margin and risk-based margin systems of covered clearing agencies, e.g., London Clearing House, Chicago Mercantile Exch.
Also, add a new rule re a covered clearing agency (CCA) recovery and wind-down plan.
Follows Covered clearing agency standards promulgated in 2016, to add specificity.
Goal is to mitigate risk from intraday price/position movements impacting margin calls.
Currently no requirement exists to monitor intraday exposures on an ongoing basis.
Executive Summary and Fact Sheet
Amends SEC Rule 17Ad-22(e)(6)(ii) and 6(iv) re standards for clearing agencies, and creates new Rule 17ad-26, recovery and wind-down plan (RWP), 17 CFR 240.17Ad-22.
Requires policies and procedures for margin systems to monitor intraday exposures on a continuous and ongoing basis and when inputs are not readily available or reliable.
Mandates authority and operational capacity to make intraday margin calls especially when thresholds are breached or when a cleared product displays elevated volatility.
Creates a new rule built upon existing RWP requirements with nine specific elements.
In order to summarize the proposal, the commission published its own fact sheet.
Recovery and Wind-Down Plan
Nine elements cover critical services, vendors, scenario analysis, process, governance.
Identify and describe the CCA's critical payment, clearing, and settlement services and provide explanation for continuation of services in the event of resolution, wind-down.
Provide detail and description of third-party providers critical to CCA critical services.
Said providers under contract, arrangement, agreement, or license; may be either external or internal such as those in a holding company structure, including affiliates.
By identifying providers in the RWP, goal is to legally obligate them during a recovery.
List scenarios that could trigger an RWP, e.g., a liquidity shortfall or uncovered credit losses, including quantitative and qualitative criteria that would necessitate recovery.
Outline procedures to inform SEC when a CCA is considering initiating a wind-down.
Develop annual process to test ability to implement RWP, i.e. test plans, governance.
Note, RWP critical services have no impact on a CCA's obligations under Reg SCI.
Risk Management Amendments
Maintain written policies re margin system to mark-to-market, collection and variation margin, monitor intraday exposure on an ongoing basis tailored to a particular market.
Determine when to collect margin due to a threshold breach or heightened volatility.
Ensure margin systems use reliable sources for substantive inputs, e.g., price data, and procedures when inputs aren't available and plans to use alternate margin system.
Lack of input may result from a provider or liquidity issues hindering price discovery.
Defines substantive as inputs necessary for a risk-based system to calculate margin.
Executive Statements
Chair Gensler, commissioners Lizarraga, Crenshaw, director of trading Zhu supported the proposal; SEC chief economist Wachter noted reinforced data/inputs as important.
Commissioner Peirce also supported, but commented on language re the collection of margin as frequently as circumstances warrant; if annual testing creates undue costs.
Both commissioner Peirce and Uyeda look to feedback from the comment period.
Consultation
Specific questions were posed re types of scenarios that may necessitate an intraday margin call, disproportionate impact to smaller participants as a result of margin calls.
Targeted questions also posed re RWP, including if specific positions/offices need to be identified under the definition of staffing to properly implement recovery, wind-down.
Comments to be received on or before 30 days after publication in the federal register.
May 30, 2023 Extension
On May 30, 2023, SEC published rule in federal register, comments by Jul. 17, 2023.
Jul. 2023 OpCC, FIA, ISDA Comment Letter
On Jul. 18, 2023, OpCC reported letter noting general agreement, reiterating need for CCAs to have flexibility re margin practices/models, to best meet intraday demand.
Recommended against strict quantitative threshold triggering unscheduled margin call.
Argued firms use apposite approaches vs specific scenarios in resolution or wind-down.
Follows Jul. 17, 2023, FIA and ISDA comment letter noting general agreement, but suggesting more prescriptive guidance to provide clear expectations for clearing clients
Emphasized predictable margin calls, advocated tor transparency initial margin models
Stressed importance of including procedures for participants to move positions during proposed orderly wind-down; credible recovery plans to ensure financial stability.
Clearer rules on non-default losses and compensation for clearing participants.
Oct. 2024 SEC Final Rule
On Oct. 25, 2024, SEC adopted final rule on resilience, recovery, wind-down for CCA.
Also published a statement by Chair Gary Gensler and provided a fact sheet on rule.
Amendments establish new requirements regarding a CCA’s collection of intraday margin as well as CCA’s reliance on substantive inputs to its risk-based margin model.
New rule prescribes requirements for contents of CCA's recovery and wind-down plan.
Each CCA required to file any proposed rule changes, advance notices required under 17 CFR 240.19b-4, Dodd-Frank Act within 150 days after publication in federal register
Proposed rule changes, notices must be effective within 390 days after publication.
Final rule to become effective 60 days after the publication in the federal register.
