September 28, 2016 / 3:17 PM / 3 years ago

U.S. to expand rules for 'too-big-to-fail' clearing houses

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission on Wednesday said it would adopt rules to strengthen the regulatory framework for clearing agencies deemed systematically important or that are involved in complex transactions, such as security-based swaps.

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

Clearing agencies act as a middlemen between the parties to securities transactions by ensuring the smooth transfer of funds and securities, and in some cases, serve as a backstop in case a brokerage defaults.

The rules are aimed at preventing clearing agencies deemed “too big to fail” from collapsing and spreading systemic market risks. These include the Fixed Income Clearing Corp, the National Securities Clearing Corp and the Options Clearing Corp.

“The use of clearing agencies is critical to the safety and efficiency of securities trading, enabling billions of dollars of securities to change hands smoothly every day,” said SEC Chair Mary Jo White. “At the same time, their centralized role in concentrating and managing financial exposures, which has grown significantly since the financial crisis, can raise systemic risk concerns.”

A key pillar of the 2010 Dodd-Frank Wall Street reform law was to reduce risk in the derivatives market by requiring many products to be routed through clearing houses.

The SEC and the Commodity Futures Trading Commission were tasked with policing the clearing houses and making sure they have enough resources to stay afloat.

The new rules would enhance existing regulations put in place in 2014 though policies and procedures such as requiring daily stress testing, monthly review and annual validation of credit risk models.

The rules would also increase capital requirements for the agencies and require them to have plans for an orderly recovery or wind-down of their operations.

The SEC also agreed to consider expanding the scope of the rules to include any registered clearing agency that provides the services of a central counterparty, central securities depository or a securities settlement system.

Separately, the regulator voted in favor of a proposal that if adopted, would shorten settlement times for most securities transactions to two days after a trade occurs from three days currently.

The move was aimed at mitigating systemic market risk by allowing funds to be freed up faster for reinvestment while reducing credit and counterparty exposure.

The idea gained steam during the 2007-09 global financial crisis as a way for firms to limit the risk associated with the person or firm on the other side of a trade defaulting.

Reporting by John McCrank, editing by G Crosse

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