Getting Their Priorities Straight: Compliance and Risk in Critical Market Infrastructure

By Abigail Howd, Spring 2018 IAC Student Intern

In 1982, Tears for Fears told us all that “when people run in circles, it’s a very, very mad world.”  Without the critical services of entities such as clearing agents, national securities exchanges, transfer agents, and systems compliance and integrity entities, it would be a very, very mad world.  These entities keep track of who owns which security and how they own it.  They provide platforms for members to trade securities and keep track of the securities’ value.  They cancel and issue certificates of ownership.  These entities perform essential functions in the securities industry and keep the capital markets from running in circles.  For this reason, the SEC’s Office of Compliance Inspections and Examinations (OCIE) included the compliance and risks in critical market infrastructures such as these in its 2018 examinations priorities list. 

Clearing Agencies “compare transaction information, calculate settlement obligations, collect margin, and may serve as a depository to hold securities as certificate or in electronic form to facilitate automated settlement.”  There are two types of clearing agencies: clearing corporations and depositories.  Clearing corporations compare member trades and prepare and sometimes mediate settlements of the trades.  Depositories hold physical securities in their vaults and record ownership of each security in their own books.  Clearing corporations work with the depositories to deliver certificates to the new owners after trade settlements.

National Securities Exchanges are securities exchanges that are registered with the SEC under Section 6 of the Securities Exchange Act of 1934 and which must meet specific requirements to qualify as such. There are over 20 national securities exchanges, including the New York Stock Exchange and NASDAQ.

Transfer Agents perform “four main functions: (i) track, record, and maintain an issuer’s security holder records, (ii) cancel and issue certificates, (iii) facilitate communications between issuers and security holders, and (iv) make distributions to security holders.”  One of the transfer agents’ most important jobs is keeping track of who owns which securities and the method of ownership, whether by certificate, book-entry form, or street name.  Most transfer agencies are banks or trust companies, but in some circumstances, companies may act as their own transfer agents.

Regulation Systems Compliance and Integrity (SCI) Entities include self-regulatory organizations such as “stock and options exchanges, registered clearing agencies, FINRA and MSRB, alternative trading systems, . . . disseminators of consolidated market data . . . , and certain exempt clearing agencies.”  The regulation applies to systems of these SCI entities which include “trading, clearance and settlement, order touring, market data, market regulation, and market surveillance.”

The OCIE will examine all these entities to verify continued compliance with applicable laws and to make sure the capital markets run as smoothly as possible.