US SEC proposes plan to bolster clearing houses’ resiliency

By John McCrank

NEW YORK (Reuters) – The U.S. Securities and Exchange Commission on Wednesday voted to propose a plan to bolster the resiliency of clearing houses during times of significant market stress, such as the 2021 “meme stock” trading frenzy.

Clearing agencies and their infrastructure are often referred to as the plumbing of the market, and stand between buyers and sellers of every trade, taking on the risk if one side defaults, or act as central securities depositories.

The SEC proposal builds on rules passed in 2016, and would require clearing houses to monitor margin exposures on an ongoing basis and gives them the authority to make intraday margin calls as frequently as circumstances warrant, the regulator said.

Specifying the ongoing monitoring of intraday exposure, and under what circumstances intraday margin calls would be made, would strengthen clearing houses’ risk management and give greater transparency around how they manage intraday risk, the SEC said.

“Intraday margin calls have been important in our markets just in the recent past,” SEC Chair Gary Gensler said during a SEC open meeting ahead of the vote on the proposal.

“It happened during the volatility in January 2021, around the so-called meme-stock events. We also had intraday margin calls just in March of this year when we had heightened Treasury volatility – volatility in the Treasury market was greater than in 35 years.”

In January 2021, a number of companies saw their stock prices surge due to social media attention rather than the companies’ fundamentals, wreaking havoc on short sellers who had bet against them.

Under the SEC proposal, clearing houses would also have to establish specific requirements in their recovery and wind-down plans, including describing how the plans would be reviewed and tested.

“Greater consistency across recovery and wind-down plans would enhance the resiliency and continuity of our market plumbing,” Gensler said.