Public Statements & Remarks

Statement of Commissioner Goldsmith Romero: Reducing the Likelihood of Chaotic Clearinghouse Failures

Proposed Rule: Derivatives Clearing Organizations Recovery and Orderly Wind-down Plans

June 07, 2023

No one expects to fail.  But the lessons from the 2008 financial crisis highlight how quickly contagion can spread between highly interconnected institutions, threatening the viability of firms.  As the Special Inspector General for TARP (“SIGTARP”), I reported to Congress on the decisions made by the Government to save “too big to fail” Wall Street institutions.  The theme that ran through our findings was a massive failure in planning, and shock from institutions and regulators caught unaware by dangerous interconnections across the financial system.  The Government intervened with bailouts to avoid the chaos from disorderly bank failures that would hurt Main Street.

Fast forward to 2023, where the financial industry and regulators were once again shocked by bank failures—regional bank failures that required government intervention, although not a bailout.  These failures seemed to happen at lightning speed as online banking and other technology as well as social media played a role in snowballing customer redemptions.[1]  Once again, the lack of planning was apparent, and the government intervention was intended to help Main Street.

That government intervention 15 years after Congress authorized TARP only reinforces the importance of Dodd-Frank Act provisions designed to protect our financial system from systemic risk.  I have reported to, and testified before, Congress on lessons learned from the 2008 financial crisis, on how to manage systemic risk, and on efforts to prevent future government intervention, such as requirements for living wills from the largest banks.  I testified before the Senate in 2014 that I strongly supported the Dodd-Frank Act’s “dual approach: front line measures aimed at keeping the largest financial institutions safe and sound, and a last line defense aimed at letting a company fail without damaging the economy.”[2]

I support the proposed rule today because it does just that.  It strengthens both front line measures and the last line of defense by laying out specific requirements for all clearinghouses to have orderly wind-down plans.  This expands our requirements for wind-down plans from a handful of clearinghouses to the full range of clearinghouses—ranging from those deemed systemically important to new or future entrants, such as those who are digital asset-focused.  The rule today codifies and strengthens the provisions in Commission guidance from 2016, and is designed in consideration of international standards.  

I support the proposed rule because it has two major benefits.  First, just as with bank living wills, the requirement for orderly wind-down plans decreases the likelihood that any failure will be disorderly, chaotic, or require government intervention, thereby protecting financial stability—in other words, the last line of defense.  Second, the exercise of creating and maintaining the plans with the specific requirements contained in the rule could help to prevent the failure of clearinghouses by shoring up areas of potential existential risk and giving the Commission insight into risk exposure for our own oversight responsibilities—in other words, front line measures.

I want to thank the staff for these efforts to implement the goals of the Dodd-Frank Act and protect the financial system.  I thank them for working with my office on changes to improve the proposal in ways that will promote greater transparency into interconnections in our financial system and improve accountability for clearinghouses as they develop and test their plans.

Last Line Defense: The Proposal Will Help Protect Financial Stability in the Face of New Kinds of Market Stress by Reducing the Likelihood of Disorderly and Chaotic Failures

As I testified to Congress in 2014, it is crucial for regulators and institutions to make use of “what was missing in the crisis – time – time to understand the interconnections and the risk they pose, and limit any dangerous risk so they are not caught unaware again.”[3]  While we already require systemically significant clearinghouses and a small handful of other clearinghouses to maintain orderly wind-down plans,[4] we do not require it for all.

In supporting the expansion of the requirement for orderly wind-down plans to all clearinghouses, I am reminded of one of my interviews with Treasury Secretary Timothy Geithner.  Secretary Geithner told me, “What size and mix of business do you classify as systemic?....It depends too much on the state of the world at the time.  You won’t be able to make a judgment about what’s systemic and what’s not until you know the nature of the shock.”[5] 

Although the Financial Stability Oversight Council makes systemic designations, the fact that the Government intervened in regional bank failures this year emphasizes that disorderly failures of even non-systemic financial players can cause chaos and harm regular people.  Additionally, this month our nation faced challenges with the debt ceiling, which would have had substantial impacts, which may not be planned for by all institutions.

By requiring orderly wind-down plans for all, and adopting the proposed standardized requirements before a crisis hits, we can better understand which market stresses might cause severe disruptions across clearinghouses, and how a failure may spread across derivatives markets, the financial system, and even the economy.  We can then engage in supervision to ensure that clearinghouses effectively manage risk.

Front Line Measures: The Best Use of Orderly Wind-Down Plans Is Helping to Ensure We Never Need to Rely on Them

It has been said that those who fail to plan, plan to fail.  But when it comes to financial stability, planning to fail is actually one of the best ways to avoid failing.  A handful of clearinghouses already have wind-down plans pursuant to Commission guidance from 2016.[6]

I support the proposed rule with its specific requirements of what these wind-down plans should include because it can help mitigate the risk of failure, and prevent the need to ever rely on them.  I testified before Congress in 2014 saying, that I encouraged regulators to use living wills to “build a comprehensive roadmap of interconnections to capture the common risks, linkages and interdependencies in the financial system.”[7]

I support that the proposed rule contains those same requirements—the inclusion of a clearinghouse’s interconnections and interdependences.  In addition to the well-established clearinghouses, our registrants include clearing houses (as well as applicants) that are focused largely on digital assets.  This includes some clearinghouses where the clearing members are retail customers.  Given the highly interconnected nature of the digital asset industry, and our lack of visibility into unregulated affiliates, we could find ourselves without the information needed to identify affiliate risk and supervise the management of that risk.  This was most notably experienced with registered clearinghouse Ledger X, an affiliate of FTX.

Additionally, an increase in cyberattacks, including the one on ION Markets, show how increasing reliance on third party services and providers can create new avenues for disruption.  When those disruptions hit multiple firms at once, the damage can compound, creating cascading failures that threaten financial stability.  By requiring clearinghouses to identify these kinds of interdependencies and interconnections before they become a problem, as well as to identify potential triggering events, document how they will monitor these triggers, and conduct stress scenario analysis, this proposal encourages a systemic perspective that would help clearinghouses and the Commission steer away from trigger events, and more comprehensively manage what would otherwise be existential risk.[8]

The proposal also requires clearinghouses to test wind-down plans annually, or when they are updated.  This is an opportunity for a regular robust assessment of the risks that a clearinghouse faces.  The proposal recognizes that testing may be enhanced by participation by other stakeholders.  I look forward to hearing comments about whether there are situations or scenarios where the participation of stakeholders other than clearing members should be required, instead of simply considered.

Clearinghouses can only identify failures caused by risks that they consider and review.  The scenarios prescribed by the proposal would require assessing a broad range of relevant risks.  I look forward to hearing from commenters about whether there are any other areas that might help us promote the resilience of clearinghouses and protect against chaotic failures.

This Proposal Will Only Protect the Financial System If We Have the Courage to Apply It

Unlike living wills for systemically important banks, there is no formal review or acceptance requirement for these wind-down plans.  But that does not excuse us from a responsibility to carefully scrutinize the plans to ensure that they are comprehensive, appropriate, and rigorously tested.  In 2011, I testified before Congress that rules designed to prevent systemic risk that would require government intervention “are only as effective as their application” and that ultimately, we “rely on the courage of the regulators to protect our nation’s broader financial system.”[9]

We should have the courage to use these plans as a roadmap for our own vigilant oversight of derivatives markets and a guide for where we should focus efforts to bolster resilience to market stresses.  I welcome comment on all aspects of the proposal, but especially those recommending additional ways we can promote financial stability.

For these reasons, I support the proposed rule.

[1] An unfortunate consequence of these regional bank failures was large numbers of depositors withdrawing their funds only to deposit them in the largest banks.  See, e.g., Edward Harrison, The Fed Is Helping Too-Big-to-Fail Banks Become Bigger, Bloomberg (May 2, 2023).

[2] Written Testimony Submitted by The Honorable Christy L. Romero, Special Inspector General for the Troubled Asset Relief Program Before the U.S. Senate Banking, Housing and Urban Affairs Committee Subcommittee on Financial Institutions and Consumer Protection, download ( (July 16, 2014) (2014 Goldsmith Romero Testimony).

[3] 2014 Goldsmith Romero Testimony.

[4] Derivatives Clearing Organizations and International Standards, 78 FR 72476, 72494 (Dec. 2, 2013). 

[5] See Statement of Christy Romero, Acting Special Inspector General, Troubled Asset Relief Program Before the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit, download (, (June 14, 2011).

[6] Staff have provided guidance on what clearing houses should consider when developing recovery and wind-down plans, much of which is codified in this rule.  CFTC Letter No. 16-61, Recovery Plans and Wind-down Plans Maintained by Derivatives Clearing Organizations and Tools for the Recovery and Orderly Wind-down of Derivatives Clearing Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16-61), available at:  The 2016 guidance was intended to be consistent with international standards.  I note that this guidance has not been updated in seven years—seven years that included disruption and substantial market stresses.

[7] 2014 Goldsmith Romero Testimony.

[8] It would require clearinghouses to identify scenarios that may prevent them from fulfilling their critical role, including not just due to adverse market outcomes, but also financial effects from cybersecurity events and other losses from interconnections with third party services and providers.  And it requires a clearinghouse to consider how a combination of failures, like the sort that crop up in a financial crisis, might affect its ability to operate. 

[9] Statement of Christy Romero, Acting Special Inspector General, Troubled Asset Relief Program Before the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit, download (, (June 14, 2011).