SEC Approves Rules Requiring Public Reporting of Swap TradesDave Michaels and Silla Brush
U.S. regulators adopted rules that will require most swaps trades to be publicly reported, a response to lax derivatives oversight in the run-up to the credit crisis.
The rules approved today by the Securities and Exchange Commission call for an interim period during which all swaps must be reported to public databases within 24 hours. Regulators said the requirements could change as they study how the reporting affects the cost and ability of banks and other firms to make large trades.
The regulations are the latest step in efforts by the SEC and Commodity Futures Trading Commission to boost transparency in the swaps market. They come more than six years after the collapse of Lehman Brothers Holdings Inc. and government rescue of American International Group Inc., which was partly rooted in unregulated swaps.
By creating a record of swaps trades, regulators aim to monitor for systemic risk while giving investors a better idea of fair prices.
“Without this transparency, both regulators and market participants were ill-prepared to deal with derivatives exposure during the events that sparked the financial crisis,” SEC Chair Mary Jo White said today.
Five Wall Street banks dominate the U.S. swaps business. JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley control 95 percent of cash and derivatives trading for U.S. bank holding companies as of Sept. 30, according to the Office of the Comptroller of the Currency. While the CFTC oversees the bulk of the market, the SEC regulates swaps based on a single company’s bonds or loans, equities, and indexes based on nine or fewer securities.
The CFTC has already approved rules that require dealers and other investors to provide price, volume and other information to the databases and the public.
Banks have lobbied for reporting delays for large trades, saying that immediate transparency will increase trading costs because other traders can detect the large demand and front-run their orders. The rules approved today don’t define what qualifies as a large trade, which the SEC said it would continue to study.
SEC Commissioner Luis Aguilar, a Democrat, said he hoped the reporting delay will eventually be shortened.
Dennis Kelleher, chief executive officer of Better Markets, which advocates for more stringent financial regulation, said “a 24-hour trade reporting delay is a 19th-century, horse-and-buggy standard for 21st century markets that move faster than the speed of light.”
The SEC’s measures also lay out rules for the swap data repositories, the central record-keepers of the information. The databases will function partly like the price feeds operated by stock exchanges that report equity trades to the public.
SEC Commissioners Daniel Gallagher and Michael Piwowar voted against the rules today. The two Republican commissioners said they objected to the inclusion of heightened liability measures for employees of swap data repositories. The provision would punish employees who lie to or mislead the data provider’s chief compliance officer.
Piwowar said the provision was rejected by the SEC’s staff and included at the request of White, Aguilar and Commissioner Kara Stein. Aguilar and Stein are Democrats.
“The majority of the commission is simply choosing to look tough at the expense of regulating well,” Piwowar said.