Clearing Companies Question SEC Plan for System Safeguards

Terry Flanagan

Operators of clearing systems are opposed to a plan by the Securities and Exchange Commission that would require that core technology of national securities exchanges, alternative trading systems, clearing agencies, and plan processors meet certain standards and conduct business continuity testing with their members and participants.

Depository Trust & Clearing Corp. (DTCC) and Options Clearing Corp. (OCC), have requested the SEC to consider the complexities associated with developing and implementing Regulation Systems Compliance and Integrity, or Reg SCI.

“There are aspects of the proposal that will pose significant operational and administrative burdens on OCC and other market participants,” said Raymond Tamayo, chief information officer at OCC.

Raymond Tamayo, OCC

Raymond Tamayo, OCC

The proposal would require all system intrusions to be disseminated to members or participants. Under this requirement, even minor viruses that are managed and quarantined, and present no material risk, would require notification to the SEC and participants, said Tamayo.

“Not all dissemination SCI events warrant dissemination to all members or participants of an SCI entity,” Tamayo said. “Many such events will only affect a limited subset of an SCI entity’s members.”

DTCC general counsel Larry Thompson noted that certain events may have a more material impact on certain types of SCI entities than others. The proposal would therefore “have the unintended consequence of triggering an inundation of notifications for minor events that may occur in the ordinary course of business.”

DTCC has three subsidiaries which are registered clearing agencies and which therefore would be subject to Reg SCI—Depository Trust Co. (DTC), National Securities Clearing Corp. (NSCC), and Fixed Income Clearing Corp. (FICC).

“As the cross-market clearing agencies for the U.S. markets, DTC, NSCC, and FICC stand at the end of the securities processing chain, and therefore are in a unique position to analyze opportunities to mitigated potential systemic risks, including those stemming from rapid changes in market technology,” Thompson said.

Further, the DTCC Data Repository (U.S.) is a swap data repository registered with the Commodity Futures Trading Commission, and plans to apply to become a security-based SDR once the SEC’s proposed SB SDR regulations are final.

Since the primary function of SB SDRs is to accept security-based swaps data and act as a repository for such data, the functions they perform differ dramatically from those of other SCI entities, and therefore should not be subject to Reg SCI, Thompson said.

DTCC urged the SEC to consider convening an industry working group or a roundtable, similar to the Market Technology Roundtable conducted by the SEC in October 2012, to further study the matter.

OCC clears all standardized options listed on the 11 U.S. national securities exchanges that trade options and in its capacity as a DCO, clears CFTC-regulated futures products for five U.A. futures exchanges.

Prior to the enactment of the Dodd-Frank Act, OCC was the only clearing organization that was dually registered as both an SEC-regulated clearing agency and a CFTC-regulated DCO.

For the past two decades, self-regulatory organizations have followed a voluntary set of principles articulated in the SEC’s Automation Review Policy and participated in what is known as the ARP Inspection Program.

The SEC has noted that the continuing evolution of the securities markets to where they have become almost entirely electronic and highly dependent on sophisticated trading and other technology (including complex regulatory and surveillance has posed challenges for the ARP Inspection Program.

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