The Securities and Exchange Commission (SEC) adopted new Regulation to create a regime for the registration and regulation of security-based swap execution facilities (SBSEFs). The new regulatory framework was required under Dodd-Frank relating to the over-the-counter derivatives market.
“Adopting Regulation SE fulfills Congress’s mandate and increases the transparency and integrity of the security-based swap market,” said SEC chair Gary Gensler in a statement. “In taking up these matters in 2021, we heard from many market participants suggesting that we should look to the Commodity Futures Trading Commission’s (CFTC) rules for swap execution facilities as our template. I believe aligning the SEC’s regime closely with the CFTC’s garners many of the same benefits – bringing together buyers and sellers with transparent, pre-trade pricing. That lowers risk in the marketplace and protects investors.”
The adoption addresses the Exchange Act’s trade execution requirement for security-based swaps and the cross-border application of that requirement, implements Section 765 of the Dodd-Frank Act to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade security-based swaps, and promotes consistency between Regulation SE and existing rules under the Exchange Act.
In adopting Regulation SE, the SEC has sought to harmonize as closely as practicable with parallel rules of the CFTC that govern swap execution facilities (SEFs) and swap execution generally.
After considering several comments, the SEC decided not to adopt a definition of “block trade” for equity swap-based securities (equity SBS), which include, for example, total return swaps based on a single security or loan, or a narrow-based security index.
“With respect to commenters’ concerns, until the [SEC] has made a clearing determination with respect to equity SBS, equity SBS will be able to trade OTC, just as their underlying cash equities can trade OTC. Moreover, before making a clearing determination for an equity SBS — which would create the circumstances in which equity SBS might be [made available to trade] and therefore subject to the trade-execution requirement — the [SEC] would have the opportunity to solicit and consider additional public comment on the effect of such a determination, including comment with respect to the concerns commenters have raised to date regarding, among other things, timely and efficient executions, hedging, and capital formation,” according to the final rule document.