SEC issues new rules for uncleared Security-Based Swaps

SEC Adopts Actions to Stand Up Security-Based Swap Regulatory Regime

The Securities and Exchange Commission today adopted a package of rule amendments, guidance, and a related order to expand and improve the framework for regulating cross-border security-based swaps, including single-name credit default swaps. The adoption of this package also stands up the Commission’s broad security-based swap regulatory regime as it triggers the compliance date for security-based swap entities to register with the Commission and the implementation period for previously adopted rules under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules establish a coherent approach to the regulation of margin, capital, segregation, recordkeeping and reporting and business conduct for security-based swaps.

The final rule amendments and guidance adopted today build upon the Commission’s experience with the multi-faceted, multi-jurisdictional security-based swap market, and prior Commission actions, in four key areas:

  • the use of transactions that have been “arranged, negotiated, or executed” by personnel located in the United States as a trigger for enhanced U.S. regulation of security-based swaps and market participants;
  • the requirement that nonresident security-based swap dealers and major security-based swap participants (collectively known as “SBS Entities”) provide a certification and opinion of counsel regarding the ability of the Commission to access information and conduct onsite examinations;
  • the cross-border application of statutory disqualification provisions; and
  • questionnaires or employment applications that registered SBS Entities must maintain with regard to their foreign associated persons.

The rule amendments are intended to improve the regulatory framework by pragmatically addressing implementation issues and efficiency concerns, including jurisdiction-specific data privacy requirements and broader issues of international comity. In addition, the rule amendments and guidance reflect consultation with the Commodity Futures Trading Commission (CFTC). Many market participants are active in markets regulated by both the Commission and the CFTC, as such participants may use instruments regulated by the Commission to hedge risks in products regulated by the CFTC, and vice versa.

SEC Adopts Risk Mitigation Techniques for Uncleared Security Based Swaps

The Securities and Exchange Commission today voted to adopt rules requiring the application of risk mitigation techniques to portfolios of uncleared security-based swaps. New Rules 15Fi-3, 15Fi-4, and 15Fi-5 establish requirements for registered security-based swap dealers and major security-based swap participants (“SBS Entities”) to:

  • Periodically reconcile outstanding security-based swaps with counterparties,
  • Engage in certain forms of portfolio compression exercises, as appropriate, and
  • Execute written trading relationship documentation with each of their counterparties prior to, or contemporaneously with, executing a security-based swap transaction.

These rules were adopted pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Commission also adopted amendments to its existing cross-border rule to provide a means to request substituted compliance with respect to the portfolio reconciliation, compression, and trading relationship documentation requirements. Finally, the Commission amended its recently-adopted recordkeeping, reporting, and notification rules to incorporate records relating to the new risk mitigation requirements.

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