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July 18, 2023

Better Markets Supports the SEC’s Efforts to Bolster Clearing Agencies

Better Markets filed a comment letter with the Securities and Exchange Commission in response to the agency’s proposed rule to strengthen and reinforce the requirements governing clearing agencies and better protect investors.

Why It Matters.  Clearing agencies play a crucial, if often underappreciated, role in our securities markets.  By acting as a central counterparty, they provide a guaranty for trades submitted to them by their participants for clearance and settlement.  In the event that a participant defaults, the clearing agency fulfills the obligations of the defaulting party, closes out the defaulting participant’s open positions, and uses the financial resources available to the agency to absorb any losses.  Although central clearing therefore provides significant benefits to the market, clearing agencies also pose substantial risks to the financial system since central clearing concentrates risk in the clearing agency.  As a result, disruption to a clearing agency’s operations, or the failure of a clearing agency to meet its obligations, could serve as a potential source of contagion in the securities markets, resulting in significant costs not only to the clearing agency itself or its members but also to other market participants or the broader U.S. financial system.

What We Said. The SEC’s proposal would augment the ability of clearing agencies to collect margin, or collateral, from their participants to guard against the risk of a participant’s default.  The proposed rules would ensure that clearing agencies monitor their intraday exposure on an ongoing basis and have the authority to make intraday margin calls to increase the required collateral as frequently as circumstances warrant.  The risks to clearing agencies are especially pronounced during periods of market volatility, and clearing agencies need to be able to respond to the risks that may arise intraday.  The proposed rules would also require that clearing agencies have recovery and wind-down plans, or ‘living wills,’ that include specific elements to prevent a contagion in the event that a clearing agency experiences severe losses and faces possible insolvency.

Bottom Line. The GameStop and meme stock trading frenzy in January 2021 highlighted the integral role clearing agencies play in managing risk in securities trading.  The clearing agencies were able to use their ability to collect margin to protect the markets during that time of heightened volatility.  The SEC’s proposal would ensure that clearing agencies continue to be able to respond to significant events and provide their critical services in periods of market stress. For these reasons, we support the SEC’s efforts to bolster the authority and resilience of clearing agencies.

Read the letter here or click the button below.

Comment Letters

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