CFTC Proposed Rule: Derivatives Clearing Organizations and International Standards

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on Derivatives Clearing Organizations and International Standards. For a summary of the final rule, click here.
Timeline, Derivative Clearing Organization and International Standards
Proposal Date Final Rule Issue Effective Date
August 13, 2013 December 2, 2013 December 31, 2013

On August 13, 2013, the CFTC proposed rules to establish additional standards for systemically important derivatives clearing organizations (SIDCOs) that are consistent with the Principles for Financial Market Infrastructures (PFMIs) and address all of the remaining gaps between part 39 of the Commission’s regulations and the PFMIs.

The proposed rules cover governance, financial resources, liquidity resources, system safeguards, special default rules and procedures for uncovered losses or shortfalls, risk management, additional disclosure requirements, efficiency, and recovery and wind-down procedures.

The proposed rule entered the Federal Register on August 16, 2013. The deadline for public comment was September 16, 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]

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. Of particular note, the paper defines a "qualifying central counterparty" (QCCP) as a CCP that is "prudentially supervised in a jurisdiction where the relevant regulator has established and publicly indicated that it applies to the central counterparty, on an ongoing basis, domestic rules and regulations that are consistent with the PFMIs."[2]

On August 12, 2013 the CFTC approved a final rule to implement enhanced risk management standards for (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.

Key Points of the Proposal

  • Governance: Arrangements must be written, clear and transparent, place a high priority on the safety and efficiency of the SIDCO or DCO, and support the broader stability of the system.
  • Financial resources for SIDCOs: Enough to meet 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.
  • System safeguards: require business continuity and disaster recovery programs that would allow for recovery of operations and resumption of processing, clearing, and settlement no later than two hours following a disruption.
  • Default procedures: Should include plans for allocation of losses and liquidity shortfalls, repaying borrowed funds and replenishing financial resources.
  • Risk management : should include periodic stress tests of financial resources and liquidity, as well as analysis of margin modeling.
  • Additional diclosure: The CPSS/IOSCO framework includes a form called "Disclosure Framework for Financial Market Infrastructures." This rule would require the submission of the form at least every two years, and following any material change to the SIDCO or DCO business structure.
  • Efficient and effective design: of clearing and settlement arrangements, operating structure and procedures, scope of products cleared and its use of technology.
  • Recovery and wind-down: Requires a viable plan for recovery or orderly wind down of the SIDCO/DCO necessitated by uncovered credit losses or liquidity shortfalls, as well as by general business risk, operational risk, or any other risk that threatens the derivatives clearing organization’s viability as a going concern. The rule also involves identification of scenarios and informing the commission if a recovery or wind-down is pending. Finally, the DCO must maintain sufficient unencumbered assets to support a recovery or wind-down.
  • Special Enforcement: The CFTC is given special enforcement authority as if the SIDCO/DCO were a Federally-insured depositary institution.

Related Documents: Fact Sheet, Federal Register Entry

References

  1. U.S. risk council identifies initial set of clearinghouses. Reuters. Retrieved on May 23, 2012.
  2. Capital requirements for bank exposures to central counterparties. Basel Committee of Banking Supervision. Retrieved on August 16, 2013.

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