The SEC granted a temporary exemption to certain "systemically important" and "complex" clearing agencies (referred to in the rules as "covered clearing agencies") from certain requirements concerning the adoption of recovery and wind-down plans. The exemption from the requirements adopted by the SEC in October 2016 was made available for such clearing agencies in order to enhance the regulation of these entities (see Exchange Act Rule 17Ad-22(e)(3)(ii)). The exemption is intended to provide additional time for the covered clearing agencies to finalize the development of recovery and wind-down plans. The SEC explained that such plans continue to present "novel and complex questions," and remain "under active discussion in the industry."
The enhanced standards had a scheduled compliance date of April 11, 2017. The new exemption stipulates that all covered clearing agencies planning to rely on this exemption must notify the SEC by April 11, 2017. The temporary exemption will expire on December 31, 2017.
Commentary - Nihal Patel
The SEC indicated that the exemption was provided in response to a request from the Depository Trust and Clearing Corporation ("DTCC"). The DTCC request noted that drafts of the clearing agencies' plans have been shared with the SEC and other regulators, and that additional work is being done with "resolution authorities" that will need to interact with the procedures required by the SEC rules.
As the DTCC request and the SEC acknowledge, the question of how best to address the risk of central counterparty ("CCP") failure is one on which regulators across the world are continuing to develop knowledge. (For example, the DTCC cited recent work by the Financial Stability Board soliciting further input, as covered in the Cabinet here.) With that in mind, perhaps the most interesting part about the exemption granted by the SEC is what aspects of the new rules will continue to be effective. In particular, the SEC will continue to require a covered clearing agency to have policies and procedures to determine the amount of "liquid net assets funded by equity" to cover the clearing agency's (i) general business risk profile and (ii) six months of current operating expenses.
Leaving these requirements in place raises the following question: if the SEC is in agreement that how best to address CCP failure remains an open question, then why proceed with imposing rules for the maintenance of equity? Based on the findings of a recent paper published by staff of the Federal Reserve Bank of Chicago (covered here), it is questionable whether such requirements address the key drivers of CCP risk.
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