Published October 22, 2012
WASHINGTON – Securities regulators on Monday adopted rules designed to bolster risk management practices for clearing agencies.
The new rules, which are required by the 2010 Dodd-Frank Wall Street reform law, mark the latest effort by the Securities and Exchange Commission to finalize regulations for the 640 trillion dollar over-the-counter derivatives market.
A centerpiece of the Dodd-Frank law, the new rules require standard swap contracts to be routed through clearinghouses, which stand in between parties to guarantee trades in the event of a default.
Regulators like the SEC and the Commodity Futures Trading Commission have also written new rules to ensure these clearing firms have the risk management and financial backing in place to handle a major spike in activity.
The SEC's new rules are designed to spell out responsibilities for securities-based swap clearing agencies, as well as traditional securities clearing agencies that were already regulated by the agency prior to Dodd-Frank.
"These new rules are designed to ensure that clearing agencies will be able to fulfill their responsibilities in the multitrillion-dollar derivatives market as well as more traditional securities markets," SEC Chairman Mary Schapiro said in a statement announcing the new rule.
"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," she said.
The new rule requires registered clearing agencies to meet certain standards on measuring and managing credit exposure, margin requirements and other risks.
Clearing agencies will need to have enough capital to withstand a default by their largest member firm, while swaps clearing agencies will need enough funds to survive a default by their two largest members with the greatest risk exposure.
The rule also requires the agencies to meet new recordkeeping and financial disclosure requirements.
Separately, the SEC's rules also lay out clearing agency membership criteria.
The Dodd-Frank law calls for open access to clearinghouses so that a diverse array of firms, and not just large dealer banks, can become members and get their swaps cleared.
The SEC said clearing agencies will be required to give non-dealers membership as long as certain criteria are met.
Clearing agencies also will not be able to discriminate by requiring a minimum portfolio size or transaction volume.
(Reporting By Sarah N. Lynch and Aruna Viswanatha; Editing by Steve Orlofsky)