CFTC Final Rule: Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations

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Gavel.png FINAL RULE: Issued August 12, 2013
Dodd-Frank Timeline, Risk Management Requirements for DCOs
Final Rule Issue Effective Date Effective Date, SIDCOs Compliance Date, SIDCOs
October 18, 2011 January 9, 2012 October 15, 2013 December 31, 2013

On August 12, 2013 the CFTC approved a final rule to implement enhanced risk management standards for systemically important derivatives clearing organizations (SIDCOs). The rule entered the Federal Register on August 16, 2013, and its effective date is October 15, 2013. SIDCOs must comply with the rule by December 31, 2013.

Background

One of the provisions of the Dodd-Frank Act is for the Financial Stability Oversight Council (FSOC) to identify financial market utilities (FMUs) whose failure or disruption of operations "could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system." Any such systemically important FMU would be subject to heightened risk management, financial resource, and other standards, but would also gain access to the Federal Reserve's emergency lending facilities. [1]

The FSOC issued its final rule on July 18, 2011 and, as of July 18, 2012, eight clearing organizations have received preliminary designation:[2][3]

On April 16, 2012, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a report on the principles for financial market infrastructures (FMIs). The report contains new and more demanding international standards for payment, clearing and settlement systems, including central counterparties.

The CFTC final rule is based upon CPSS/IOSCO principles and the FSOC recommendations.

Key Points of the Rule

  • SIDCOs must maintain financial resources sufficient to enable it to meet its financial obligations to its clearing members notwithstanding a default by the two clearing members creating the largest combined financial exposure in "extreme but plausible" market conditions.
  • Assessments for additional guaranty fund contributions (i.e., guarantee fund contributions that are not pre-funded) shall not be included in the calculations.
  • Within a year of the effective date, business continuity and disaster recovery plans need to enable the SIDCO to resume daily clearing, processing and settlement functions within two hours following a disruption.
  • The CFTC is given special enforcement authority as if the SIDCO were a Federally-insured depositary institution.

Related Documents: Fact Sheet and Federal Register Entry

References

  1. U.S. risk council identifies initial set of clearinghouses. Reuters. Retrieved on May 23, 2012.
  2. OCC Received Proposed Systemic Designation From U.S. Regulators. BloombergBusinessweek. Retrieved on May 24, 2012.
  3. 8 tagged as potential threats to financial system. CNBC. Retrieved on July 19, 2012.

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