SEC targets security-based swaps

Washington, D.C., Nov. 19, 2010 — The Securities and Exchange Commission today voted unanimously to propose new rules entailing how security-based swap transactions should be reported and publicly disseminated.

The rules are proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally authorizes the SEC to regulate security-based swaps. The proposed rules (Regulation SBSR) represent an important step in the SEC's continuing effort to increase the transparency of the security-based swap market and fulfill mandates under the Dodd-Frank Act.

"This proposal lays out who must do security-based swap reporting, what information must be reported, and where and when it must be reported," said SEC Chairman Mary L. Schapiro. "These rules would provide for post-trade transparency in the security-based swap markets, and are designed to provide all market participants access to transaction information at the same time."

The SEC is seeking public comment on the proposed rules for a period of 45 days following its publication in the Federal Register.

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Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act established a comprehensive framework for regulating the over-the-counter swaps markets — a market that previously had been excluded from regulatory oversight and that has grown exponentially in recent years. Among other things, Title VII of the Act authorizes the Commission to regulate security-based swaps and to take steps to encourage accountability and transparency in this market.

To enhance such transparency, Congress established centralized recordkeeping facilities, known as security-based swap data repositories. In a separate proposed rulemaking, the Commission outlines the core principles and duties of these repositories.

Under these proposed rules, the Commission would describe who would be responsible for reporting the security-based swap information, what information would be required to be reported, and where the information would be reported. As required by Dodd-Frank, the rules also would indicate what information would be publicly disseminated.

Proposed Regulation SBSR

Under the proposed rules, known as Regulation SBSR (proposed Rules 900 through 911):

  • Parties to a security-based swap transaction would be required to report information about each transaction to a registered security-based swap data repository.
  • The registered security-based swap repository would be required to publicly disseminate certain of that information in a timely fashion.

More specifically, the proposed rules would:

  • Specify the categories of information to be reported to a repository in real time and publicly disseminated. Among other things, this would generally include information about the asset class of the security-based swap, information about the underlying security, the price, the notional amount, the time of execution, the effective date and the scheduled termination date.
  • Specify certain additional categories of information to be reported to a repository for regulatory purposes, but not publicly disseminated. Among other things, this would generally include the counterparty; the broker, trader and desk ID; the amounts of any up-front payments and description of the terms of the payment streams; the title of any master agreement governing the transaction; and, the data elements needed to determine the market value of the transaction.
  • Require the reporting of certain events that result in changes to previously reported information about a security-based swap transaction.
  • Identify which counterparty to a security-based swap transaction would be required to report information to a repository.

To facilitate the reporting and dissemination of the information, the rules would require that registered security-based swap data repositories:

  • Establish and maintain policies and procedures regarding security-based swap transaction data that would be reported and disseminated.
  • Register with the Commission as securities information processors.

Parties who report to the registered repositories, and who are registered as security-based swap dealers or major security-based swap participants, would be required to establish and maintain policies and procedures designed to ensure that they comply with applicable reporting obligations.

With respect to block trades, the Commission will propose and solicit comment on general criteria that would be used to determine block trade thresholds, without proposing actual thresholds at this time. At a later date, the Commission expects to consider a recommendation that would propose and solicit comment on specific block trade thresholds.

Finally, as required by the Dodd-Frank Act, the rules would exempt security-based swaps from the calculation of fees under Section 31 of the Exchange Act.

Other Regulators

Under the law, the SEC has authority over "security-based swaps," which are broadly defined as swaps based on a single security or loan or a narrow-based group or index of securities or events relating to a single issuer or issuers of securities in a narrow-based security index.

The CFTC has primary regulatory authority over all other swaps. The CFTC and SEC share authority over "mixed swaps," which are security-based swaps that also have a commodity component.

The Commodity Futures Trading Commission is proposing similar rules with respect to the reporting and public dissemination of information related to swaps that fall under the CFTC's jurisdiction.

In addition to working closely with the CFTC in preparing this proposal, the SEC and the CFTC held a joint public roundtable to gain further insight into many of the issues addressed in the rules.

Recent Rulemaking

Under the Dodd-Frank Act, the Commission has been engaging in significant rulemaking:

  • Security-based swap fraud: Proposed a new rule to help prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap — as well as in connection with ongoing payments and deliveries under a security-based swap.
  • Security-based swap conflicts: Proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.
  • Reporting of pre-enactment security-based swaps: Adopted an interim rule that requires certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act. This rule applies only to such swaps whose terms had not expired as of July 21.
  • Asset-backed securities: Proposed rules that would enhance ABS disclosure by:
    • Requiring registered ABS issuers to perform a review of the bundled assets that underlie the ABS.
    • Requiring an ABS issuer to disclose the nature, findings and conclusions of this review of assets.
    • Requiring the issuer or underwriter for both registered and unregistered ABS offerings to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review.
  • Whistleblower: Proposed a whistleblower program, under Dodd-Frank provisions, that would reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.
  • Say-on-Pay: Proposed rules, under Dodd-Frank, that would enable shareholders to cast advisory votes on executive compensation and "golden parachute" arrangements.
  • Municipal advisor registration: Adopted a temporary rule requiring municipal advisors to register with the SEC as required by Dodd-Frank.

What's Next?

The proposed rules would be published in the Federal Register with a 45-day public comment period. The Commission will review the comments it receives and consider those comments in determining whether to adopt the proposed rules.

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