SEC Open Meeting
Securities and Exchange Commission
Open Meeting
Wednesday, September 28, 2016
Key Topics & Takeaways
- Unanimous Approval: Both the final rule on enhanced clearing agency standards and the proposed amendment to the clearing agency definition were unanimously approved, as well as the amendment to move from a T+3 to T+2 settlement cycle.
- Definition of Covered Clearing Agency: Commissioner Stein opined that the rules being considered regarding covered clearing agencies were a “missed opportunity” to strengthen the oversight, so they are better able to withstand market disruptions, and that she hopes market participants provide additional comment suggesting ways to improve upon the releases.
- Shortened Settlement Cycles: Chair White and Commissioners Stein and Piwowar all voiced their support for a shortened settlement cycle, explaining that it will reduce risk in the markets, and asked market participants to comment on even shorter settlement cycles, such as T+1.
Speakers
- Mary Jo White, Chair, Securities and Exchange Commission (SEC)
- Kara Stein, SEC Commissioner
- Michael Piwowar, SEC Commissioner
- Stephen Luparello, Director, Division of Trading and Markets
- Division of Trading and Markets Staff Members
Opening Statement
In her opening statement, SEC Chair Mary Jo White discussed how the Commission’s examination and supervisory programs have been expanded through new regulatory requirements and procedures. She continued that while clearing agencies are “crucial” to the safety and efficiency of financial markets, their concentration can raise systemic risk concerns. White explained that the supervision and regulation of clearing agencies “goes beyond rules,” and that regulations today “do not stand alone.” The requirements being considered today, White concluded, “are not static,” and will need to continue to evolve for the role of clearing in the securities markets.
Presentations
Standards for Covered Clearing Agencies and Amendment to Definition of “Covered Clearing Agency” in Rule 17Ad-22
Division of Trading and Markets Director Stephen Luparello explained that the rules being recommended today would apply to all clearing agencies that meet the definition of a “covered clearing agency” (CCA), and that they are designed to be “robust and flexible” to accommodate the “full spectrum” of activities that clearing agencies can conduct. He continued that while the Principles for Financial Market Infrastructures (PFMI) is considered the “relevant international standard,” the Commission also consulted with the Financial Stability Oversight Council (FSOC), Commodity Futures Trading Commission (CFTC), and Federal Reserve in developing their rules. Luparello noted that the new rules represent “an important step” in the enhancement of CCAs, and that while the amended definition of clearing agency is an “incremental” change, it is also an important one as all clearing agencies registered with the SEC will be subject to the new enhanced requirements.
Mark Flannery, Director of the Division of Economic and Risk Analysis, focused on how the policies and procedures established by the rules can improve risk management, caveating that such improvements can increase costs. He continued that such costs could be passed on to market participants, and possibly resulting in a reduction in liquidity due to participants leaving the markets, as well as the possibility of increased market barriers to entry. Flannery explained, however, that such enhanced standards would importantly serve to reduce the risk of default for clearing agencies. He concluded that the proposal regarding amendments to the CCA definition would not have any substantial economic effects in the short run, and that he anticipates financial stability will improve in the long term.
Staff member Mathew Lee explained the key provisions of the rule on new policies and procedures for CCAs, including: 1) managing liquidity through stress testing; 2) credit, margin and collateral risk through stress testing; 3) sound risk management framework that includes recovery and resolution provisions; and 4) requiring at least six months of operating expenses so CCAs have sufficient capital in the event of a recovery or meltdown.
Commissioner Kara Stein noted that while well-run clearing agencies are important to the healthy functioning of financial markets, it is “not an area where we can be lax,” and that there is a need for clear, enforceable standards so clearing agencies do not transmit risk. She voiced her concern over the standards up for discussion, expressing concern that there is “too much wiggle room” and they “simply fall short.” Stein stressed that standards for systemically important clearing agencies should be clear and unambiguous, and that while the rules should have been stronger, they are “long past due.” Regarding the clearing agency rulemaking and proposal, she opined that it is a “missed opportunity” to strengthen the oversight of systemically important clearing agencies so they are better able to withstand market disruptions, and that she hopes market participants comment on additional ways to improve.
Commissioner Michael Piwowar explained that the role of CCAs in the financial markets is “only increasing,” and that while oversight has been “dominated” by the PFMI, he applauded SEC staff’s efforts to create a regulatory structure consistent with PFMI rules but tailored to achieve the SEC’s unique regulatory goals. He continued that the current regulatory state of clearing agency regulations is “one of the things that keep [him] up at night” due to his concern that the Dodd-Frank Act has created “too many icebergs” for the financial system to “navigate.”
Both the final rule on enhanced clearing agency standards and the proposed amendment to the clearing agency definition were unanimously approved in 3-0 votes.
Amendment to Rule 15c6-1
White noted that she has supported the move from a T+3 settlement cycle to a shortened T+2 cycle “from the beginning,” and that while there will be costs for market participants, shortening the cycle should create benefits to investors, reduce the margin and liquidity demands on market participants, and increase global harmonization in settlement cycles. She continued that the proposal solicits input on the T+2 settlement cycle, as well as the T+1 and T+0 settlement cycles, though there has been less analysis around further reductions.
Luparello stated that moving from a T+3 to T+2 settlement cycle is an “important step” in the SEC’s efforts to reduce costs and increase the efficiency in the U.S. trading system. He continued that shortening the cycle to T+2 will benefit all market participants and reduce systemic risk.
Flannery explained that a shorter settlement cycle will result in fewer transactions remaining unsettled at one time, and that the cost of mitigating and managing risk will also reduce. He continued that the potential costs of updating systems are appropriate when considering the possible reductions in market risk.
Staff member Jeffrey Mooney added that there is an industry-set target date of September 5, 2017 for the launch of a T+2 settlement cycle, and that the Commission is moving forward to prepare testing schedules based on the implementation date, though it is accepting comments on the proposed implementation date.
Stein stated that faster settlements should reduce the risks faced by investors, broker-dealers, systemically important financial market utilities, and others, and that the longer the period between trade execution and settlement, the more risk there is. She continued that longer settlement periods increase counterparty default risk, liquidity risk, and overall systemic risk, and that a shorter settlement time will make the market more efficient. Stein noted that market participants should comment on their experiences in foreign jurisdictions that already have shorter settlement cycles in place.
Piwowar stated that he “enthusiastically” supports the proposal to shorten the settlement cycle. He continued that shortening the cycle will reduce counterparty credit, liquidity and market risks, align trade processing to global markets, and improve investor protections, calling the proposal a “no brainer…slam dunk…cake walk.” Piwowar concluded by asking market participants to comment on moving towards a T+1 cycle.
The amendment to Rule 15c6-1 was unanimously approved.
For more information on this meeting, please click here.
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Securities and Exchange Commission
Open Meeting
Wednesday, September 28, 2016
Key Topics & Takeaways
- Unanimous Approval: Both the final rule on enhanced clearing agency standards and the proposed amendment to the clearing agency definition were unanimously approved, as well as the amendment to move from a T+3 to T+2 settlement cycle.
- Definition of Covered Clearing Agency: Commissioner Stein opined that the rules being considered regarding covered clearing agencies were a “missed opportunity” to strengthen the oversight, so they are better able to withstand market disruptions, and that she hopes market participants provide additional comment suggesting ways to improve upon the releases.
- Shortened Settlement Cycles: Chair White and Commissioners Stein and Piwowar all voiced their support for a shortened settlement cycle, explaining that it will reduce risk in the markets, and asked market participants to comment on even shorter settlement cycles, such as T+1.
Speakers
- Mary Jo White, Chair, Securities and Exchange Commission (SEC)
- Kara Stein, SEC Commissioner
- Michael Piwowar, SEC Commissioner
- Stephen Luparello, Director, Division of Trading and Markets
- Division of Trading and Markets Staff Members
Opening Statement
In her opening statement, SEC Chair Mary Jo White discussed how the Commission’s examination and supervisory programs have been expanded through new regulatory requirements and procedures. She continued that while clearing agencies are “crucial” to the safety and efficiency of financial markets, their concentration can raise systemic risk concerns. White explained that the supervision and regulation of clearing agencies “goes beyond rules,” and that regulations today “do not stand alone.” The requirements being considered today, White concluded, “are not static,” and will need to continue to evolve for the role of clearing in the securities markets.
Presentations
Standards for Covered Clearing Agencies and Amendment to Definition of “Covered Clearing Agency” in Rule 17Ad-22
Division of Trading and Markets Director Stephen Luparello explained that the rules being recommended today would apply to all clearing agencies that meet the definition of a “covered clearing agency” (CCA), and that they are designed to be “robust and flexible” to accommodate the “full spectrum” of activities that clearing agencies can conduct. He continued that while the Principles for Financial Market Infrastructures (PFMI) is considered the “relevant international standard,” the Commission also consulted with the Financial Stability Oversight Council (FSOC), Commodity Futures Trading Commission (CFTC), and Federal Reserve in developing their rules. Luparello noted that the new rules represent “an important step” in the enhancement of CCAs, and that while the amended definition of clearing agency is an “incremental” change, it is also an important one as all clearing agencies registered with the SEC will be subject to the new enhanced requirements.
Mark Flannery, Director of the Division of Economic and Risk Analysis, focused on how the policies and procedures established by the rules can improve risk management, caveating that such improvements can increase costs. He continued that such costs could be passed on to market participants, and possibly resulting in a reduction in liquidity due to participants leaving the markets, as well as the possibility of increased market barriers to entry. Flannery explained, however, that such enhanced standards would importantly serve to reduce the risk of default for clearing agencies. He concluded that the proposal regarding amendments to the CCA definition would not have any substantial economic effects in the short run, and that he anticipates financial stability will improve in the long term.
Staff member Mathew Lee explained the key provisions of the rule on new policies and procedures for CCAs, including: 1) managing liquidity through stress testing; 2) credit, margin and collateral risk through stress testing; 3) sound risk management framework that includes recovery and resolution provisions; and 4) requiring at least six months of operating expenses so CCAs have sufficient capital in the event of a recovery or meltdown.
Commissioner Kara Stein noted that while well-run clearing agencies are important to the healthy functioning of financial markets, it is “not an area where we can be lax,” and that there is a need for clear, enforceable standards so clearing agencies do not transmit risk. She voiced her concern over the standards up for discussion, expressing concern that there is “too much wiggle room” and they “simply fall short.” Stein stressed that standards for systemically important clearing agencies should be clear and unambiguous, and that while the rules should have been stronger, they are “long past due.” Regarding the clearing agency rulemaking and proposal, she opined that it is a “missed opportunity” to strengthen the oversight of systemically important clearing agencies so they are better able to withstand market disruptions, and that she hopes market participants comment on additional ways to improve.
Commissioner Michael Piwowar explained that the role of CCAs in the financial markets is “only increasing,” and that while oversight has been “dominated” by the PFMI, he applauded SEC staff’s efforts to create a regulatory structure consistent with PFMI rules but tailored to achieve the SEC’s unique regulatory goals. He continued that the current regulatory state of clearing agency regulations is “one of the things that keep [him] up at night” due to his concern that the Dodd-Frank Act has created “too many icebergs” for the financial system to “navigate.”
Both the final rule on enhanced clearing agency standards and the proposed amendment to the clearing agency definition were unanimously approved in 3-0 votes.
Amendment to Rule 15c6-1
White noted that she has supported the move from a T+3 settlement cycle to a shortened T+2 cycle “from the beginning,” and that while there will be costs for market participants, shortening the cycle should create benefits to investors, reduce the margin and liquidity demands on market participants, and increase global harmonization in settlement cycles. She continued that the proposal solicits input on the T+2 settlement cycle, as well as the T+1 and T+0 settlement cycles, though there has been less analysis around further reductions.
Luparello stated that moving from a T+3 to T+2 settlement cycle is an “important step” in the SEC’s efforts to reduce costs and increase the efficiency in the U.S. trading system. He continued that shortening the cycle to T+2 will benefit all market participants and reduce systemic risk.
Flannery explained that a shorter settlement cycle will result in fewer transactions remaining unsettled at one time, and that the cost of mitigating and managing risk will also reduce. He continued that the potential costs of updating systems are appropriate when considering the possible reductions in market risk.
Staff member Jeffrey Mooney added that there is an industry-set target date of September 5, 2017 for the launch of a T+2 settlement cycle, and that the Commission is moving forward to prepare testing schedules based on the implementation date, though it is accepting comments on the proposed implementation date.
Stein stated that faster settlements should reduce the risks faced by investors, broker-dealers, systemically important financial market utilities, and others, and that the longer the period between trade execution and settlement, the more risk there is. She continued that longer settlement periods increase counterparty default risk, liquidity risk, and overall systemic risk, and that a shorter settlement time will make the market more efficient. Stein noted that market participants should comment on their experiences in foreign jurisdictions that already have shorter settlement cycles in place.
Piwowar stated that he “enthusiastically” supports the proposal to shorten the settlement cycle. He continued that shortening the cycle will reduce counterparty credit, liquidity and market risks, align trade processing to global markets, and improve investor protections, calling the proposal a “no brainer…slam dunk…cake walk.” Piwowar concluded by asking market participants to comment on moving towards a T+1 cycle.
The amendment to Rule 15c6-1 was unanimously approved.
For more information on this meeting, please click here.