At an open meeting, the SEC voted to adopt amendments and guidance related to its rules concerning the regulatory reporting and public dissemination of security-based swap transactions ("Regulation SBSR").
The adopted amendments follow the SEC's initial adoption of Regulation SBSR in February 2015. The newly amended regulation will, among other things:
- require a platform – i.e., a national securities exchange or security-based swap execution facility ("SEF") that is registered with the SEC or exempt from registration – to report a security-based swap ("SBS") executed on such platform that will be submitted to clearing;
- require a registered clearing agency to report any SBS to which it is a counterparty;
- require registered security-based swap data repositories ("SDRs") to provide the SBS transaction data that they are obligated to disseminate publicly to users of the information on a non-fee-charging basis;
- extend Regulation SBSR's regulatory reporting and public dissemination requirements to additional types of cross-border security-based swaps; and
- provide guidance regarding the application of Regulation SBSR to prime brokerage transactions and the allocation of cleared security-based swaps.
In a statement at the open meeting, SEC Chair Mary Jo White indicated that the SEC intends to complete its security-based swap dealer rulemaking requirements under Title VII by the end of this year.
The final amendments will become effective 60 days after their publication in the Federal Register. Compliance with Regulation SBSR will involve the following conditions:
- The bulk of the reporting requirements will specify compliance on the later of (1) six months after the first SDR that can accept reports in the relevant asset class registers with the SEC or (2) one month after the registration compliance date for SBS dealers. The same compliance date would apply to certain requirements that are applicable to SDRs.
- The public dissemination requirements will specify compliance three months after the first compliance date.
- The reporting of "historical" security-based swaps will be required two months after the second compliance date.
Commentary / Nihal Patel
The two Regulation SBSR adopting releases comprise over 1,000 pages. The regulation is comprehensive. Clearly, the SEC has learned lessons from the CFTC's implementation process and is attempting to address some of the questions that arose for the CFTC. For example, the SEC provides lengthy guidance on (i) reporting security-based swaps that involve allocation (pp. 127-140) and (ii) prime brokerage transactions (pp. 140-152). In each of these situations, CFTC staff was forced to provide guidance immediately after the reporting rules went live.
Notably, one amendment affects the SEC application of its "arranged, negotiated or executed" concept to the reporting of transactions. The amendment states that reporting is required in transactions between two non-U.S. persons (and not guaranteed by U.S. persons) if one of the entities is dealing (but unregistered) and the SBS is "arranged, negotiated or executed" by personnel in a U.S. branch or office. In adopting this regulation, the SEC acknowledges (at p. 173) that this concept likely will affect only four foreign dealers. That acknowledgement begs the question: how can such a collective burden (i.e., the reporting infrastructure) be justified as a minimization of systemic risk in the case of four firms doing a small amount of business – especially when those firms and their counterparties will take their underlying financial risk with them to their country of origin?
The final amendments were adopted with strong support from all of the SEC Commissioners, who seemed to be pushing for the completion of the rules. Commissioner Kara M. Stein noted that, before the crisis, "[n]o one understood where the risk resided or how concentrated exposures were." Similarly, Commissioner Michael S. Piwowar supported the compliance schedule but commented that delaying the rule involves risks, since "[o]ne of the greatest lessons we learned during the financial crisis was that both regulators and the public did not understand the risks posed by the [OTC derivatives] markets." Commissioner Piwowar criticized Chair White pointedly: the Commissioners "have no idea," he said, "when final rules on capital and margin will make their way onto the [SEC's] agenda." He also mentioned bipartisan calls for completion (which were voiced first by Commissioners Stein and Aguilar, and then by Commissioners Piwowar and Gallagher), and questioned why those calls "have not been enough to influence the Chair into prioritizing our Title VII mandates."
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