September 26, 2023

Ms. Vanessa Countryman
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Mr. Christopher Kirkpatrick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581

Re: Proposed Covered Clearing Agency Resilience and Recovery and Wind-Down Plans, Release No. 34-97516; File No. S7-10-23, 88FR 34708 (May 30, 2023)

Proposed Derivatives Clearing Organizations Recovery and Order Wind-Down Plans, Information for Resolution Sharing, RIN 3038-AF16, 88 FR 48968 (July 28, 2023)

Ms. Countryman and Mr. Kirkpatrick:

The Securities Industry and Financial Markets Association (“SIFMA”),1 including SIFMA Asset Management Group (“SIFMA AMG”),2 appreciates the opportunity to provide comments to both the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC,” and together with the SEC, the “Commissions”) on the SEC release titled “Covered Clearing Agency Resilience and Recovery and Wind-Down Plans” (the “SEC Proposal”)3 and the CFTC release titled “Derivatives Clearing Organizations Recovery and Order Wind-Down Plans, Information for Resolution Sharing” (the “CFTC Proposal,” and together with the SEC Proposal, the “Proposals”).4 5 

SIFMA supports the Commissions’ shared goals to strengthen the risk management of the clearing agencies subject to the respective Proposals (“Clearing Agencies”) through changes to margin practices and more detailed requirements for recovery and wind-down plans (“RWPs”). SIFMA believes that the adoption and implementation of the Proposals is an important step towards improving the ability of Clearing Agencies to withstand significant stress events and to continue operations through them. SIFMA believes that by anticipating potential challenges, as the Proposals require, Clearing Agencies would be in an improved position to manage issues and set expectations for clearing members and market participants.

Increasing the resilience of Clearing Agencies in a default or non-default loss scenario is an objective of fundamental importance as a failure of a Clearing Agency not only subjects clearing members and market participants to material financial damage, but it could also harm the stability of the U.S. financial markets. In this regard, the SEC’s Proposal is increasingly relevant in light of the SEC’s recent proposal to require increased clearing of the Treasury market, which would occur through a single SEC-regulated Clearing Agency.

While clearing financial products provides meaningful risk reduction to the market, it transitions and concentrates significant financial risk management into a handful of entities. Clearing mandates serve to amplify this concentration and make rigorous regulatory oversight critical to managing potential systemic risks.

The Commissions must go beyond merely requiring a Clearing Agency to identify and describe its risk management practices – including its practices with respect to margin and winddown. The Commissions should establish standards reflecting industry best practices, require stress and back-testing with respect to such standards, and periodically review and refresh such standards based on market conditions. It is inappropriate for market participants to be required to clear while allowing Clearing Agencies to exercise excessive flexibility in establishing and performing critical risk management procedures.

Given comments at each Agency’s open meeting, we recognize that our memberships generally prefer principles-based regulations. However, the Commissions must consider the relative absence of competitive forces to drive consistent voluntary risk management enhancements, the existing practice of many clearing agencies to mutualize certain risks to clearing members and market participants, and the challenges long faced by clearing members and market participants to elicit requested voluntary risk management enhancements. For these reasons, it is time for the Agencies to enact mandatory requirements – many of which reflect existing best practices – to establish the most resilient level playing field for this systemically-important market.

Executive Summary

The SEC Proposal sets out two related, but distinct, risk management requirements: (i) that each of the Clearing Agencies adopt defined procedures for the collection of intraday margin; and (ii) that each of the Clearing Agencies define any problem that could cause an interruption or cessation of the services provided by that Clearing Agency and explain how the Clearing Agency would prevent or respond to each such problem in a manner that allows the continuation or resumption of the Clearing Agency’s services (such a response is a “recovery and wind-down plan” or “RWP”) with the minimum damage to clearing members, their customers, and the markets generally. The CFTC Proposal is focused on the development of an RWP, though of course margin requirements are one of the essential elements to making it less likely that a Clearing Agency will be forced to implement its RWP. Both of the Commissions’ proposed requirements build on, and make more specific, existing regulations.

SIFMA’s members, both clearing members and market participants, are directly at risk of the fallout from a Clearing Agency failure, especially as non-defaulting clearing members and their non-defaulting market participants may be called on to contribute to the Clearing Agency through default fund assessments, gains haircutting (for CFTC-regulated clearing houses), partial tear-ups, or otherwise. Thus, they have an immediate interest in the safe and prudent operation of the Clearing Agencies. Our members are in agreement with the Commissions’ determination that there is a very significant benefit to requiring the Clearing Agencies to better define their risk management procedures. Our comments on the Proposals seek greater specificity with respect to a Clearing Agency’s RWP plans, policies, procedures, and tools; standards to be established, tested, reviewed, and revised by the Commissions; and increased involvement by clearing members and market participants in the development and oversight thereof.

Improved risk management at the Clearing Agencies depends not only on a Clearing Agency’s internal consideration of risks, but also on the active participation by clearing members and market participants in the consideration of potential problems and in response planning. Accordingly, our comments deal not only with the specifics of the Proposals as regards to both intraday margin and RWPs, but also with related matters of resolution planning generally, stress testing, default management, capital and skin-in-the-game, non-default losses, and, not least, good governance, which should include input from clearing members and market participants.6

Following a summary of SIFMA’s views on the Proposals, in Section I we discuss the SEC’s proposed intraday margin requirement and in Section II we discuss both the Commissions’ proposed requirements for recovery and wind-down plans. As these Proposals provide for needed enhancements to certain aspects of Clearing Agency resiliency, in Section III we provide a comprehensive outline of our thinking on related recommendations to still further enhance Clearing Agency resiliency particularly as to funding and capital requirements.

Our comments in Section III are essential to the RWP Proposals put forward by both the Commissions. That is, it is critical to address Clearing Agency resiliency holistically, as a firm foundation of mandated risk management standards is needed both to mitigate the risk of a Clearing Agency recovery and wind-down and to ensure that if such events ever arise, thorough planning has been done and capital is sufficient to provide for the best achievable outcome.

An outline of our comments is as follows:

• Clearing Agencies should be required to collect intraday margin.

Intraday margin (both initial margin and variation margin) should be affirmatively required to be collected from any clearing member whose start of day margin has become insufficient as a result of position changes or market movements. Failure to collect and maintain adequate margin from one clearing member transfers the risk of that deficiency to the other clearing members and market participants.

Initial margin requirements should be robust and transparent so clearing members may reasonably anticipate margin calls (including intraday margin). As further detailed below, SIFMA supports procedures that it believes are most likely to result in the “right-sizing” of margin requirements and in their transparency, which we believe should result in very limited use of discretionary margin calls. Intraday margin calls should be regularly scheduled while ad-hoc intraday calls should be made only in extreme circumstances. Margin models must be transparent and predictable.

• Clearing Agencies should be required to establish detailed RWPs.

Standards should be established for a Clearing Agency’s recovery and winddown rules, policies, procedures, and tools. As stated in the CFTC Proposal, “the disorderly failure of a [Clearing Agency] would likely cause significant disruption in [the markets it serves] . . . and could lead to severe systemic disruptions . . . Ensuring [Clearing Agencies] can continue to provide critical operations and services as expected, even in times of extreme stress, is therefore central to financial stability.”78

Counterparty Practices to Address Non-default Losses (Oct. 3, 2022); SIFMA AMG, re: Governance Requirements for Derivatives Clearing Organizations (Oct. 13, 2022); SIFMA AMG, re: Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule with Respect to U.S. Treasury Securities (Dec. 23, 2022).

The procedures should clearly distinguish between the treatment of default losses resulting from the failure of a clearing member and non-default losses caused by the Clearing Agency’s internal business decisions. Financial responsibility for non-default losses (“NDLs”) should be borne by the Clearing Agency and not by clearing members and market participants.

The Clearing Agencies cannot be expected to adopt sufficient procedures without input from clearing members and market participants. SIFMA urges that the Commissions’ requirements with respect to RWPs, as ultimately adopted, require the participation of clearing members and market participants in the development of RWPs.

The Commissions must play an active oversight role both in the review of the plans and in the consideration of their sufficiency. The Commissions’ oversight role is essential to the process.

• Comprehensive enhancements to the Clearing Agency capital regime are necessary for an effective RWP.

Rules are needed to require Clearing Agencies to reserve for required skin-in-the-game (“SITG”) levels, to reserve appropriate amounts for non-default losses (“NDLs”), to cap clearing member assessments and require Clearing Agencies to solicit shareholders for meaningful contributions to the default waterfall, and to arrange ex-ante resources for use in RWPs.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (“GFMA”).

2 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

3 Covered Clearing Agency Resilience and Recovery and Wind-Down Plans, available at Exchange Act Release No. 34-97516 (May 17, 2023), 88 FR 34708-34743 (May 30, 2023) (the “SEC Proposing Release”).

4 Derivatives Clearing Organizations Recovery and Order Wind-Down Plans, Information for Resolution Sharing, available at 88 FR 48968-49055 (July 28, 2023) (the “CFTC Proposing Release”).

5 SIFMA and SIFMA AMG, along with several other trade associations, submitted a letter to the SEC in June requesting an extension of the SEC’s comment period to align with the CFTC’s comment period. See Letter from the Futures Industry Association, International Swaps and Derivatives Association, Investment Company Institute (ICI), Managed Funds Association, Securities Industry and Financial Markets Association (SIFMA), and SIFMA Asset Management Group, to Vanessa Countryman, Secretary, SEC (June 28, 2023), available at https://www.sec.gov/comments/s7-10-23/s71023-216139-439924.pdf. We subsequently filed a brief letter with the SEC on July 17 explaining that we planned to submit a single letter to both the SEC and CFTC addressing both the CFTC Proposal and the SEC Proposal, which we do today. See Letter from William C. Thum, Managing Director and Assistant General Counsel, SIFMA AMG, to Vanessa Countryman, Secretary, SEC (July 17, 2023), available at https://www.sec.gov/comments/s7-10-23/s71023-225939-473322.pdf.

6 See also prior SIFMA AMG letters to the SEC, CFTC, CMPI and IOSCO: SIFMA AMG re:
Implementation of LSOC Protections for Excess Customer Margin by Derivatives Clearing (Jun. 4, 2013); SIFMA AMG, re: CFTC Roundtable of Recovery of Derivatives Clearing Organizations (Mar. 19, 2015); SIFMA AMG, re: Essential Aspects of CCP Resolution Planning (FSB Discussion Note) (Oct. 17, 2016); SIFMA AMG, re: Framework for Supervisory Stress Testing of Central Counterparties (Sep. 22, 2017); SIFMA AMG, re: Response to Discussion Paper on Central Counterparty Default Management Auctions (Aug. 9, 2019); SIFMA AMG, re: Part 190 Bankruptcy Regulations (Proposed Amendments – RIN 3038-AE67) (Jul. 13, 2020); SIFMA AMG, re: AMG Recommendations for CCP Evaluation Framework (Feb.1, 2021); SIFMA AMG, re: DCO Capital and Skin in the Game (Jul. 13, 2021); SIFMA AMG, re: Consultative Report on Review of Margin Practices (Jan. 26, 2022); SIFMA AMG, re: Letter to CPMI and IOSCO on Client Clearing (Feb. 7, 2022); SIFMA AMG, re: Central

7 CFTC Proposal at text accompanying footnote 10.

8 SIFMA acknowledges that several Clearing Agencies have been designated as being systemically important financial market utilities (“SIFMUs”) and are subject to a heightened oversight regime for risk