Wednesday, January 21, 2015

SEC Adopts New Rules Governing Security-Based Swaps Transactions

Author: David Schwartz J.D. CPA

The SEC has issued final rules governing security-based swap data repositories (SDRs) prescribing reporting to regulators and setting public disclosure requirements for security-based swap transaction data.  These new rules implement mandates under Title VII of the Dodd-Frank Act requiring the SEC and CFTC to regulate swaps markets. The final rules approved by the Commission on January 14, 2015 "provide a powerful framework for trade reporting and the public dissemination of information that addresses blind spots exposed by the financial crisis.”   

Title VII of the Dodd Frank Act expanded the definition of "security" under both the Securities Act and the Exchange Act to include security-based swaps. This change has given the SEC new powers to regulate security-based swaps and subjects these swaps to most of the same regulations as the underlying securities on which they are based. As part of the new regime for security-based swaps the new rules:

  • Require an SDR to register with the SEC and set forth other requirements with which SDRs must comply (providing an exemption from registration for certain non-U.S. SDRs when specific conditions are met);
  • Adopt Regulation SBSR, which outlines the information that must be reported and publicly disseminated for each security-based swap transaction;
  • assigns reporting duties for many security-based swap transactions;
  • require SDRs registered with the SEC to establish and maintain policies and procedures
  • recognize the Global Legal Entity Identifier System as the system from which security-based swap counterparties must obtain codes to identify themselves when reporting security-based swap data; and
  • address the application of Regulation SBSR to cross-border security-based swap activity and include provisions to permit market participants to satisfy their obligations under Regulation SBSR through compliance with the comparable regulation of a foreign jurisdiction. 
In addition to adopting these final rules, the Commission also proposed some fine tuning amendments that would:
  • assign reporting duties for certain security-based swaps not addressed by the adopted rules;
  • prohibit registered SDRs from charging fees to or imposing usage restrictions on the users of publicly disseminated security-based swap transaction data, and
  • provide a compliance schedule for certain provisions of Regulation SBSR.

The new rules will become effective 60 days after they are published in the Federal Register. Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the Federal Register. The compliance date for certain provisions of Regulation SBSR is the effective date, and the Commission is proposing compliance dates for the remaining provisions of Regulation SBSR in the proposed amendments release.

Details of the SEC's broader swaps and derivatives initiatives are available at the SEC's Dodd-Frank Derivatives page.