US regulators establish clearing supervision framework

US regulators the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the board of the Federal Reserve (the Fed) have set out plans for meeting their supervisory goals related to the clearing business.

The three agencies have to provide consistency in oversight and risk monitoring according to Section 813 of the Dodd-Frank Act, which was enacted on 21 July 2010. The supervisory framework for designated clearing entities (DCEs), provided by Congress in Title VIII of the act, emphasises the systemic risk that DCEs can create and encourages closer consultation between supervisors.

DCEs are systemically important clearing entities, defined as closed systems that provide multilateral clearing and settlement services and risk management services to their members.

To meet their obligations under Dodd-Frank, the three agencies have set out five actions. The CFTC and the SEC will consult the Fed and other agencies as they finalise rulemakings that establish risk management standards for derivatives clearing organisations, which are registered with the CFTC, and clearing agencies, which are registered with the SEC. This consultation should be continued as future agency rulemakings connected to risk management standards for DCEs are developed.

The CFTC and SEC will also develop a formal process for consulting with the Fed on proposing material changes to a DCE's operation. All three bodies will develop a consultative mechanism that promotes a shared understanding of potential systemic risks and allows the exchange of information regarding relevant risk management practice.

It is also suggested that the three should develop a process for consulting annually on the scope and methodology of the SEC's and CFTC's planned examinations of DCEs and allowing them each to comment on the examinations themselves.

Finally they will develop an appropriate process for sharing information on DCEs.

The Group of 20 agreed in September 2009 that all standardised OTC derivative contracts must be cleared through central counterparties by end-2012. The Dodd-Frank Act is partly the US response to that agreement, and these latest measures are safeguards against the consequences of central counterparty failure, made more serious for the wider financial system by the increased volumes and range of contracts that they will process.