SEC Proposes Swap Dealer, Participant Definitions Required by Dodd-Frank
The U.S. Securities and Exchange Commission proposed definitions to determine which firms will face higher capital and margin requirements under new rules for the $583 trillion over-the-counter swaps market.
SEC commissioners voted 5-0 today to seek comment on proposals designed to match those endorsed by the Commodity Futures Trading Commission in a 3-2 vote on Dec. 1. The two Washington-based agencies are charged with revamping oversight of derivatives markets under the Dodd-Frank law.
Dodd-Frank, the financial-regulation overhaul enacted in July, aims to shift most swaps to clearinghouses, exchanges and other trading platforms to increase transparency after largely unregulated trades complicated efforts to resolve the credit crisis in 2008. The law gives the SEC authority over securities- based swaps, with the CFTC overseeing the rest of the market.
The SEC proposal defines security-based swap dealers as firms that are commonly understood to be security-based swaps dealers, make a market in security-based swaps and regularly enter such swaps with counterparties. The measure provides an exclusion for firms that enter into such swaps for their own accounts on an irregular basis.
“The definitions are the foundation of the regulatory structure we are building,” said Commissioner Elisse Walter, a Democrat who joined other members in welcoming industry comment on how the proposed standards would affect market participants.
The SEC and CFTC are required to spell out details of a three-part test for determining whether a firm is a major swap participant. The proposals released this week flesh out the tests for whether a firm has a “substantial position” in a swaps market, whether it is using swaps to hedge or mitigate commercial risk and whether it is highly leveraged.
Designation as a major swap participant would subject a firm to higher capital, margin and business-conduct standards. CFTC Chairman Gary Gensler said in September that 200 global financial firms might fall under his agency’s swap-dealer definition.
The SEC estimated that there may be 50 security-based swap dealers under the definition proposed today. About 10 firms, the agency estimated, may need to run tests to determine if they need to register as major security-based swap participants.
SEC Commissioner Troy Paredes, a Republican, backed the proposal while expressing concern that the thresholds for defining swaps dealers and major swaps participants would include firms that don’t pose systemic risk to markets.
The definitions will be subject to public comment for 60 days, and the proposals won’t become official until they pass second votes from both the SEC and the CFTC.
Derivatives, including swaps, are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
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