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SEC Adopts Procedures for Clearing Agencies

Joe Mont | June 28, 2012

 The Securities and Exchange Commission has adopted new rules that establish procedures for its review of clearing agency actions.  The rules stem from a Dodd-Frank Act mandate that called for a new regulatory framework for trading in over-the-counter derivatives, including swap agreements.

The rules detail how clearing agencies will provide information to the SEC about security-based swaps that the clearing agencies plan to accept.

The SEC also adopted rules requiring clearing agencies that are designated as "systemically important" to submit advance notice of changes to their rules, procedures, or operations if these changes could materially affect the nature or level of risk.

Currently, self-regulatory organizations (SRO), including clearing agencies, are required to file with the SEC copies of any proposed rule or any proposed change in rules. Unless a clearing agency has rules that permit it to clear a security-based swap, it would need to obtain SEC approval .

The Dodd-Frank Act requires the SEC to adopt rules for establishing the way in which clearing agencies must submit information for a determination of whether such swaps are subject to mandatory clearing.

That legislation also gives regulators enhanced authority over clearing agencies that are designated as systemically important by the Financial Stability Oversight Council. That designation mandates 60 days advance notice to a supervisory agency before any change is made to its rules, procedures, or operations that could materially affect the nature or level of risk that the entity presents. The SEC is required to adopt rules that define and describe when such clearing agencies are required to file notices with it.

Under the final rule, a clearing agency will be required to file information with the SEC regarding security-based swaps. These submissions will be filed electronically using the existing Electronic Form 19b-4 Filing System and Form 19b-4. The final rule also describes the quantitative and qualitative information that must accompany each submission, and requires clearing agencies to post security-based swap submissions on their public websites within two business days.

Advance notice by "systemically important" clearing agencies will need to be filed electronically with the SEC using the existing Electronic Form 19b-4 Filing System and Form 19b-4. They must also be posted on the clearing agency's public website within two business days.

Changes that could require advance notice may include, but are not limited to, changes that materially affect participant and product eligibility, risk management, daily or intraday settlement procedures, default procedures, system safeguards, governance, or financial resources of the designated clearing agency. Changes that may not require advance notice include those concerned solely with the administration of the designated clearing agency.

Most of these new rules become effective 60 days after the date of publication in the Federal Register. However, the amendments to Form 19b-4 and the requirement to submit security-based swap submissions and advance notices electronically using the Electronic Form 19b-4 Filing System and Form 19b-4 will not become effective until Dec. 10, 2012. Until that date, clearing agencies will be required to make these filings by sending them to a dedicated electronic mailbox established by the SEC.