SEC on SBS De Minimis Counting
Securities
and Exchange Committee
Open
Meeting
Wednesday,
February 10, 2016
Key
Topics & Takeaways
-
Unanimous Consent: The Securities and Exchange
Commission (SEC) voted unanimously in favor of a final rule that would apply
the Title VII security-based swap dealer (“SBSD”) de minimis counting
requirements to security-based swap (“SBS”) transactions connected with a non-U.S.
person’s dealing activity that are arranged, negotiated, or executed by
personnel located in a U.S. branch or office or by the personnel or agent of
non-U.S. persons located in a U.S. branch or office.
- Final Rule “Largely Unchanged”: The SEC’s
Luparello explained that the final rule is “largely unchanged” from the 2015
proposal, which he claimed should help ensure that dealer registration applies
to the “vast majority” of swap dealing activity in the U.S.
-
Reducing Global Risk Transmission: Commissioner
Stein stated that the final rule will ensure that foreign dealers operating in
the U.S. cannot “evade registration” requirements in the U.S., which will help
mitigate the likelihood that securities based swaps transfer risk globally “in
unpredictable ways.”
- SEC Priorities Moving Forward: Chair White noted that the
Commission will turn its attention to finalizing its business conduct rules, as
well as capital, margin and segregation requirements for uncleared SBS.
Speakers
- Mary Jo White, Chair
-
Kara Stein, Commissioner
- Michael Piwowar, Commissioner
- Stephen Luparello,
Director, Division of Trading and Markets
- Margaret Rubin, Attorney
Advisor, Division of Trading and Markets
- Jennifer
Marietta-Westberg, Deputy Director and Deputy Chief Economist, Division of
Economic and Risk Analysis
Opening
Remarks
In
her opening
remarks, Chair White explained that the Commission will consider a final
rule that clarifies what type of transactions count toward the de minimus
threshold that determines whether an entity is required to register as a
security-based swap dealer. White
further noted that “[t]his important issue is one we have considered in prior
releases, including in a re-proposal last year, and it is one that the CFTC
continues to consider.”
White
maintained that the final rule is “integral to the SEC’s regulation of the
security-based swap market, representing a key milestone in the completion of
[its] regime for overseeing dealers.” White explained that the rule will
subject a significant amount of activity to Title VII’s dealer requirements,
thereby maintaining a level-playing field between U.S. and non-U.S. based
counterparties. She went on to state her belief
that the rule serves to further the goals of “reducing
risk, enhancing transparency, and promoting market integrity within the
financial system […] by helping ensure that all transactions of dealers that
involve market-facing activity by personnel located in the United States are
treated equally.” She further stated
that the rules would stand to “mitigate the likelihood and extent of
market fragmentation, which could limit US market participants to a liquidity
pool that is only a fraction of the current size of the current market, with
potentially worse pricing and less efficiency.”
White
also signaled that, as result of this final rule, the Commission will be able
to move forward to adopt the remaining requirements for dealers, including
business conduct requirements and capital, margin and segregation rules for
uncleared SBS. She further noted that the Commission would continue to
coordinate with the CFTC.
Staff Proposal
Stephen Luparello, Director, Division of
Trading and Markets
Luparello
explained that the Commission’s final rule is “largely unchanged” from the 2015
proposal, which focused on the market-facing activity of non-U.S.
dealers. He also claimed that the final rule should help ensure that
dealer registration applies to the “vast majority” of swap dealing activity in
the U.S., which he claimed will reduce competitive distortions that exacerbate
market fragmentation and increase risk. He highlighted that staff
carefully considered public comments in response to the Commission’s original
proposal in 2015 on the subject matter, as well as comments received in
response to CFTC releases on similar issues.
Margaret Rubin, Attorney Advisor, Division of
Trading and Markets
Rubin
explained that the final rule focuses on market facing activities in connection
with SBSD registration requirements, and that it provides additional
clarification around the treatment of algorithmic trading and electronic
execution. She also explained that the final rule should make it easier to identify
transactions subject to an activities-based test.
Jennifer
Marietta-Westberg, Deputy Director and Deputy Chief Economist, Division of
Economic and Risk Analysis
Marietta-Westberg
explained that DERA’s analysis indicated that the benefits of the final rule
outweigh the associated costs for market participants, as the requirements
would: (1) provide a more level playing field for U.S. and non-U.S. dealers
that use U.S.-based personnel to engage in SBS transactions; (2) reduce the
likelihood that liquidity in the SBS market splits into one pool that is less
accessible to non-U.S. counterparties; and (3) promote the risk mitigation
goals of Title VII, as well as reduce the likelihood for financial risks to
spill over into the U.S. market from overseas.
Marietta-Westberg
also noted that the rule would serve to “make more costly” the types of
restructuring activity a firm might undertake to avoid registration with the
Commission, thus limiting the possibility of market fragmentation, including
costs associated with the relocation of personnel outside of the US and the
forgoing of access to local expertise on SBS based on US-reference
entities.
Commissioner
Stein expressed
support for the final rule, stating that it recognizes the “global nature of
swaps and their attendant risk,” and ensures that foreign dealers operating in
the U.S. cannot “evade registration” requirements in the U.S. Stein
stated that SBS can transfer risk globally “in unpredictable ways,” which she
argued allowed the financial crisis to “spread quickly around the world.”
Stein
noted that the SBS market remains “truly global” and highlighted that “[a]bout half of the trading activity in
North American corporate single-name CDS occurs between U.S. counterparties and
those based abroad, while approximately 40 percent occurs between non-U.S.
counterparties.” Stein further stated that many non-U.S.
counterparties are actually foreign affiliates of a U.S. financial group, which
she explained, may expose the U.S. financial group to “reputational risk” if
its foreign affiliate runs into problems and market participants question the
group’s creditworthiness.
Stein
explained that “when security-based
swap transactions occur between two non-U.S. persons, but are arranged,
negotiated, or executed by personnel or agents located in a U.S branch or
office of a dealer, those transactions cannot be excluded from the volume test
used to trigger dealer registration requirements.” She further noted the final rule will “ensure
that any dealer that exceeds the $8 billion notional threshold, including any
of its dealing activity in the U.S., would need to register with the Commission
during the initial phase in period.” Stein went on to highlight that SBSD
registration “triggers important obligations and responsibilities for the good
of the overall marketplace, for the good of the entities that may transmit
those risks, as well as enhancing resilience in times of stress. This
rule appropriately considers the risks to the U.S. financial markets.”
Lastly,
Stein also noted that the Commission must work to finalize its business conduct
rules and capital, margin and segregation requirements for uncleared swaps, and
further handle outstanding issues relating to SBS reporting and dissemination,
as well as clearing and trade execution requirements.
Piwowar
expressed his support for this rulemaking, and claimed that after two earlier
proposals, the “third time is the charm.” Piwowar noted that the final
rule, while is applies to a relatively narrow portion of the market, is a
“vital part of the overall Title VII framework.” Piwowar praised the
Commission’s consensus-based decision making on this rule and stated his hope
that the several additional outstanding rules on noncontroversial aspects of
Title VII can also receive unanimous support in the future.
The
proposed rule was approved by unanimous consent.
More
information about this event can be accessed here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:SEC,Publish Year:2016
Securities
and Exchange Committee
Open
Meeting
Wednesday,
February 10, 2016
Key
Topics & Takeaways
-
Unanimous Consent: The Securities and Exchange
Commission (SEC) voted unanimously in favor of a final rule that would apply
the Title VII security-based swap dealer (“SBSD”) de minimis counting
requirements to security-based swap (“SBS”) transactions connected with a non-U.S.
person’s dealing activity that are arranged, negotiated, or executed by
personnel located in a U.S. branch or office or by the personnel or agent of
non-U.S. persons located in a U.S. branch or office.
- Final Rule “Largely Unchanged”: The SEC’s
Luparello explained that the final rule is “largely unchanged” from the 2015
proposal, which he claimed should help ensure that dealer registration applies
to the “vast majority” of swap dealing activity in the U.S.
-
Reducing Global Risk Transmission: Commissioner
Stein stated that the final rule will ensure that foreign dealers operating in
the U.S. cannot “evade registration” requirements in the U.S., which will help
mitigate the likelihood that securities based swaps transfer risk globally “in
unpredictable ways.”
- SEC Priorities Moving Forward: Chair White noted that the
Commission will turn its attention to finalizing its business conduct rules, as
well as capital, margin and segregation requirements for uncleared SBS.
Speakers
- Mary Jo White, Chair
-
Kara Stein, Commissioner
- Michael Piwowar, Commissioner
- Stephen Luparello,
Director, Division of Trading and Markets
- Margaret Rubin, Attorney
Advisor, Division of Trading and Markets
- Jennifer
Marietta-Westberg, Deputy Director and Deputy Chief Economist, Division of
Economic and Risk Analysis
Opening
Remarks
In
her opening
remarks, Chair White explained that the Commission will consider a final
rule that clarifies what type of transactions count toward the de minimus
threshold that determines whether an entity is required to register as a
security-based swap dealer. White
further noted that “[t]his important issue is one we have considered in prior
releases, including in a re-proposal last year, and it is one that the CFTC
continues to consider.”
White
maintained that the final rule is “integral to the SEC’s regulation of the
security-based swap market, representing a key milestone in the completion of
[its] regime for overseeing dealers.” White explained that the rule will
subject a significant amount of activity to Title VII’s dealer requirements,
thereby maintaining a level-playing field between U.S. and non-U.S. based
counterparties. She went on to state her belief
that the rule serves to further the goals of “reducing
risk, enhancing transparency, and promoting market integrity within the
financial system […] by helping ensure that all transactions of dealers that
involve market-facing activity by personnel located in the United States are
treated equally.” She further stated
that the rules would stand to “mitigate the likelihood and extent of
market fragmentation, which could limit US market participants to a liquidity
pool that is only a fraction of the current size of the current market, with
potentially worse pricing and less efficiency.”
White
also signaled that, as result of this final rule, the Commission will be able
to move forward to adopt the remaining requirements for dealers, including
business conduct requirements and capital, margin and segregation rules for
uncleared SBS. She further noted that the Commission would continue to
coordinate with the CFTC.
Staff Proposal
Stephen Luparello, Director, Division of
Trading and Markets
Luparello
explained that the Commission’s final rule is “largely unchanged” from the 2015
proposal, which focused on the market-facing activity of non-U.S.
dealers. He also claimed that the final rule should help ensure that
dealer registration applies to the “vast majority” of swap dealing activity in
the U.S., which he claimed will reduce competitive distortions that exacerbate
market fragmentation and increase risk. He highlighted that staff
carefully considered public comments in response to the Commission’s original
proposal in 2015 on the subject matter, as well as comments received in
response to CFTC releases on similar issues.
Margaret Rubin, Attorney Advisor, Division of
Trading and Markets
Rubin
explained that the final rule focuses on market facing activities in connection
with SBSD registration requirements, and that it provides additional
clarification around the treatment of algorithmic trading and electronic
execution. She also explained that the final rule should make it easier to identify
transactions subject to an activities-based test.
Jennifer
Marietta-Westberg, Deputy Director and Deputy Chief Economist, Division of
Economic and Risk Analysis
Marietta-Westberg
explained that DERA’s analysis indicated that the benefits of the final rule
outweigh the associated costs for market participants, as the requirements
would: (1) provide a more level playing field for U.S. and non-U.S. dealers
that use U.S.-based personnel to engage in SBS transactions; (2) reduce the
likelihood that liquidity in the SBS market splits into one pool that is less
accessible to non-U.S. counterparties; and (3) promote the risk mitigation
goals of Title VII, as well as reduce the likelihood for financial risks to
spill over into the U.S. market from overseas.
Marietta-Westberg
also noted that the rule would serve to “make more costly” the types of
restructuring activity a firm might undertake to avoid registration with the
Commission, thus limiting the possibility of market fragmentation, including
costs associated with the relocation of personnel outside of the US and the
forgoing of access to local expertise on SBS based on US-reference
entities.
Commissioner
Stein expressed
support for the final rule, stating that it recognizes the “global nature of
swaps and their attendant risk,” and ensures that foreign dealers operating in
the U.S. cannot “evade registration” requirements in the U.S. Stein
stated that SBS can transfer risk globally “in unpredictable ways,” which she
argued allowed the financial crisis to “spread quickly around the world.”
Stein
noted that the SBS market remains “truly global” and highlighted that “[a]bout half of the trading activity in
North American corporate single-name CDS occurs between U.S. counterparties and
those based abroad, while approximately 40 percent occurs between non-U.S.
counterparties.” Stein further stated that many non-U.S.
counterparties are actually foreign affiliates of a U.S. financial group, which
she explained, may expose the U.S. financial group to “reputational risk” if
its foreign affiliate runs into problems and market participants question the
group’s creditworthiness.
Stein
explained that “when security-based
swap transactions occur between two non-U.S. persons, but are arranged,
negotiated, or executed by personnel or agents located in a U.S branch or
office of a dealer, those transactions cannot be excluded from the volume test
used to trigger dealer registration requirements.” She further noted the final rule will “ensure
that any dealer that exceeds the $8 billion notional threshold, including any
of its dealing activity in the U.S., would need to register with the Commission
during the initial phase in period.” Stein went on to highlight that SBSD
registration “triggers important obligations and responsibilities for the good
of the overall marketplace, for the good of the entities that may transmit
those risks, as well as enhancing resilience in times of stress. This
rule appropriately considers the risks to the U.S. financial markets.”
Lastly,
Stein also noted that the Commission must work to finalize its business conduct
rules and capital, margin and segregation requirements for uncleared swaps, and
further handle outstanding issues relating to SBS reporting and dissemination,
as well as clearing and trade execution requirements.
Piwowar
expressed his support for this rulemaking, and claimed that after two earlier
proposals, the “third time is the charm.” Piwowar noted that the final
rule, while is applies to a relatively narrow portion of the market, is a
“vital part of the overall Title VII framework.” Piwowar praised the
Commission’s consensus-based decision making on this rule and stated his hope
that the several additional outstanding rules on noncontroversial aspects of
Title VII can also receive unanimous support in the future.
The
proposed rule was approved by unanimous consent.
More
information about this event can be accessed here.