The Securities and Exchange Commission today proposed two rules that would require market participants, such as proprietary (or principal) trading firms, who assume certain dealer functions, in particular those who as act as liquidity providers in the markets, to register with the SEC, become members of a self-regulatory organization (SRO), and comply with federal securities laws and regulatory obligations.
If adopted, the proposed rules, Exchange Act Rules 3a5-4 and 3a44-2, would further define the phrase “as a part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Act to identify certain activities that would cause persons engaging in such activities to be “dealers” or “government securities dealers” and subject to the registration requirements of Sections 15 and 15C of the Act, respectively.
Under the proposed rules, any market participant that engages in activities as described in the rules would be a “dealer” or “government securities dealer” and, absent an exception or exemption, required to: register with the Commission under Section 15(a) or Section 15C, as applicable; become a member of an SRO; and comply with federal securities laws and regulatory obligations, including as applicable, SEC, SRO, and Treasury rules and requirements.
The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
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A hedge fund’s basis trade is not likely to satisfy the qualitative standards of the Proposed Rules, because a futures contract and a Treasury of similar maturity would not qualify as substantially similar securities since the futures contract is not a security. Also, since transactions associated with repurchase agreements would not count toward the Proposed Rules’ quantitative standard, most hedge funds’ basis trading would likely not satisfy that standard. A large-volume basis trading hedge fund could hypothetically be captured by the quantitative standard, but a recent study suggests that few, if any, basis trades involve enough Treasury trading volume to meet the threshold of $25 billion per month in 4 out of the past 6 calendar months.