The Securities and Exchange Commission (SEC) has recently adopted final rules applicable to SEC-registered Covered Clearing Agencies (CCA), which are intended to help protect investors by enhancing CCAs’ risk management practices to ensure their resiliency and continuity in the event of catastrophic market downturns. In particular, the final rule—titled “Covered Clearing Agency Resilience and Recovery and Wind-Down Plans” (the Final Rule)—amends SEC Rule 17Ad-22 to require CCAs to: (i) monitor and collect margin on an intraday basis; (ii) comply with documentation standards for the use of substantive inputs in a risk-based margin system (the CCA Standards); and (iii) develop detailed recovery and wind-down plans (RWP) that address specific risks and requirements. 

Intraday Exposure Monitoring, Intraday Margin Calls and Substantive Inputs

Ongoing Monitoring of Intraday Exposures

The Final Rule mandates that CCAs must continuously monitor intraday exposures. The SEC believes that this ongoing assessment is crucial for identifying and managing risks that may arise throughout the trading day, rather than relying solely on end-of-day evaluations. The rationale behind this requirement is to ensure that CCAs can react promptly to significant fluctuations in exposure caused by market movements, member activity, or other factors.

Frequency of Intraday Margin Calls

The Final Rule amends SEC Rule 17Ad-22’s previous requirements regarding intraday margin calls, moving away from a rigid framework that defined specific circumstances under which such calls were mandatory. Instead, the new requirement allows for greater flexibility, stating that CCAs must make intraday margin calls “as frequently as circumstances warrant.” This change acknowledges that market conditions can vary significantly throughout the day, and CCAs need the discretion to respond to these conditions as they arise. The Final Rule provides examples of circumstances that may necessitate an intraday margin call, such as significant price movements, changes in the creditworthiness of clearing members, or other risk factors that could affect the overall exposure. This approach promotes a more responsive and adaptive risk management process.

Document Standards

The Final Rule also requires CCAs to document their rationale when they choose not to make an intraday margin call, following their established written policies and procedures. This requirement emphasizes the importance of transparency and accountability in risk management practices. By documenting their decisions and inputs, CCAs can provide evidence of their risk assessment processes and ensure compliance with regulatory expectations. This documentation is intended to also serve as a critical reference for examining the effectiveness of the CCA’s risk management strategies and for regulatory reviews. It encourages CCAs to maintain a disciplined approach to risk management, ensuring that decisions are made based on sound judgment and documented criteria.

Substantive Inputs 

Amendments to Rule 17Ad-22(e)(6)(iv) establish new requirements for a CCA relying on substantive inputs to its risk-based margin model, including when such substantive inputs are not readily available or reliable.

Contents of a Recovery and Orderly Wind-Down Plan

When the CCA Standards were adopted in 2016, Rule 17Ad-22(e)(3)(ii) required that a CCA’s policies and procedures include an RWP, but declined to include any requirements regarding the RWP’s content. 

Under the Final Rule, the SEC has adopted Rule 17Ad-26, which sets out specific requirements that a CCA’s RWP must meet. Most notably, the new rule prescribes nine elements that must be included in all RWPs so that a CCA can effectively allocate uncovered losses, manage liquidity shortfalls, and address capital shortfalls arising from other causes. For example, an RWP will need to identify and describe the rules, policies, procedures, and any other tools or resources on which the covered clearing agency would rely in a recovery or orderly wind-down.

Compliance Dates

The Final Rule has two compliance dates: (i) 150 days after publication in the Federal Register for a CCA to file any required proposed rule changes or advance notices with the SEC; and (ii) 390 days after publication in the Federal Register for such proposed rule changes and advance notices to be effective. The Final Rule, which was only adopted on October 25, 2024, has not been published in the Federal Register as at the date of this article. 

The Final Rule is available here.