SEC Proposes Capping Banks’ Stakes in Clearinghouses

Mary Schapiro, chairman of the U.S. SEC
Mary Schapiro, chairman of the U.S. Securities and Exchange Commission. Photographer: Jin Lee/Bloomberg

Banks and major swap users would be limited to 20 percent ownership of derivatives clearinghouses, exchanges and trading platforms under a proposal approved by the Securities and Exchange Commission.

SEC commissioners voted 5-0 today to approve the proposal, which would also bar groups of banks from owning more than 40 percent of a venue that clears securities-based swaps. The ownership cap, aimed at preventing conflicts of interest in the $615 trillion derivatives market, is similar to a proposal made this month by the Commodity Futures Trading Commission.

“The over-the-counter derivatives markets have a relatively high concentration of market activity through a limited number of dealers,” SEC Chairman Mary Schapiro said before the vote. “This concentrated market structure creates the potential for conflicts if a similarly small number of firms are able to control the trading and clearing venues for the security-based swap markets.”

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among five banks that control 97 percent of the U.S. derivatives market. Regulators have said that if those banks are permitted to dominate ownership of trading platforms, they may exclude other firms for competitive advantage or try to keep certain products in over-the-counter markets that lack transparency.


Derivatives are securities whose value is linked to assets such as stocks, bonds or commodities. U.S. lawmakers sought to regulate the products through the Dodd-Frank overhaul measure passed in July after outstanding trades complicated efforts to respond to the 2008 financial crisis.

As securities firms including Bear Stearns Cos. and Lehman Brothers Holdings Inc. faced collapse, government agencies struggled to determine how connected the companies were to other banks through derivatives transactions.

Clearinghouses, which are capitalized by their members, increase stability in derivatives markets because they lessen the effect of a default by sharing risk among the members. They also use daily margining procedures to keep accounts current and allow regulators to see market positions and prices.

Under Dodd-Frank, derivatives regulation is divided between the SEC and CFTC. The SEC oversees swaps based on single stocks or loans. The CFTC has authority over derivatives tied to energy and agricultural products as well as interest rates. Both agencies have to write rules for regulating derivatives.

A second ownership option proposed by the SEC would bar any securities firm from owning more than 5 percent of a clearing agency.

The proposal requires that at least 35 percent of any clearinghouse’s board be independent of the owners. The mandate would also apply to board committees.

The SEC will seek feedback from investors and securities firms before the agency’s staff makes any changes. The rule requires a second vote by SEC commissioners to become binding.

SEC commissioners separately approved a rule that requires banks to report any unexpired swap transactions that they entered before Dodd-Frank was approved.

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