SEC Approves Proposal Establishing Capital , Margin Requirements for Swap Entities
AT TODAY’S SEC OPEN MEETING, proposals to establish capital, margin, and segregation requirements for security-based swap dealers (SBSD) and major security-based swap (SBS) participants, and capital requirements for broker-dealers were unanimously approved.
In her opening statement, Chairman Mary Schapiro discussed how approval of today’s proposal represent the SEC’s near completion of its proposal phase of Dodd-Frank Title VII requirements. She noted the Commission’s cognizance of “corollary” capital and margin rules proposed by the Commodity Futures Trading Commission and the prudential regulators, and said the SEC’s proposal will reflect similarities and differences with those proposals.
The proposed rule sets minimum capital, margin, and segregation requirements for SBSDs as well as outlines certain risk management requirements for these entities. The capital requirements for SBSDs would be closely modeled on the rule that governs capital for broker-dealers and would establish a fixed dollar minimum as well as a ratio requirement equal to eight percent of the margin requirement for cleared and uncleared swaps. Of note, any SBSDs who are not approved by the SEC to use internal models for capital calculation would have to apply haircuts when computing net capital.
With regard to variation margin, SBSDs would be required to determine current exposures through mark-to-market calculations of the positions and collateral in the account to determine equity in that account. Initial margin requirements would be determined by applying the deductions required under the SBSD capital rule to the positions in the account. Eligible collateral would include cash, securities, and/or money market instruments. However, only the value after applying prescribed haircuts to securities and money market instruments would count toward the margin requirements. Collateral would not be collected for exposures to commercial end users.
Major SBS participants would be required to maintain a positive tangible net worth and to meet certain risk management standards. These entities would also be required to collect margin collateral to cover counterparty exposure and to deliver collateral to cover the counterparty’s exposure to them.
A fact sheet of the proposal can be found here and for an interactive map of the SBS regulatory regime prepared by the SEC, please click here.
During presentation of the proposal, staff noted that economic analyses were conducted on the rule but encouraged market participants to provide their analyses of the proposal and any accompanying data. Commissioner Elisse Walter echoed this request by calling on interested parties to not only provide their view on the proposal but to also discuss any alternatives and relevant data.
Although he voted in favor of the rule, Commissioner Luis Aguilar questioned whether the net capital requirements for SBSDs and major SBS participants were sufficient to adequately safeguard the financial stability of those entities. Notably, Aguilar also questioned whether the capital of these entities would be adequately safeguarded when margin is not collected from commercial end users.
Finally, Commissioner Daniel Gallagher asked when the SEC’s proposal addressing the extraterritorial application of Title VII regulations (cross border document) would be released. Robert Cook, Director of the SEC’s Division of Trading and Markets said significant efforts are underway to put out a comprehensive document in the “short-term.” He noted that the SEC would be conducting meetings with U.S. and foreign regulators over “the next month or so” to identify any emerging gaps with regard to the implementation of new regulatory regimes. Cook added that today’s capital and margin rules mark the end of the SEC’s Title VII proposal phase and said the cross border document will be the capstone to those rules.
For a webcast of the meeting, please click here.
AT TODAY’S SEC OPEN MEETING, proposals to establish capital, margin, and segregation requirements for security-based swap dealers (SBSD) and major security-based swap (SBS) participants, and capital requirements for broker-dealers were unanimously approved.
In her opening statement, Chairman Mary Schapiro discussed how approval of today’s proposal represent the SEC’s near completion of its proposal phase of Dodd-Frank Title VII requirements. She noted the Commission’s cognizance of “corollary” capital and margin rules proposed by the Commodity Futures Trading Commission and the prudential regulators, and said the SEC’s proposal will reflect similarities and differences with those proposals.
The proposed rule sets minimum capital, margin, and segregation requirements for SBSDs as well as outlines certain risk management requirements for these entities. The capital requirements for SBSDs would be closely modeled on the rule that governs capital for broker-dealers and would establish a fixed dollar minimum as well as a ratio requirement equal to eight percent of the margin requirement for cleared and uncleared swaps. Of note, any SBSDs who are not approved by the SEC to use internal models for capital calculation would have to apply haircuts when computing net capital.
With regard to variation margin, SBSDs would be required to determine current exposures through mark-to-market calculations of the positions and collateral in the account to determine equity in that account. Initial margin requirements would be determined by applying the deductions required under the SBSD capital rule to the positions in the account. Eligible collateral would include cash, securities, and/or money market instruments. However, only the value after applying prescribed haircuts to securities and money market instruments would count toward the margin requirements. Collateral would not be collected for exposures to commercial end users.
Major SBS participants would be required to maintain a positive tangible net worth and to meet certain risk management standards. These entities would also be required to collect margin collateral to cover counterparty exposure and to deliver collateral to cover the counterparty’s exposure to them.
A fact sheet of the proposal can be found here and for an interactive map of the SBS regulatory regime prepared by the SEC, please click here.
During presentation of the proposal, staff noted that economic analyses were conducted on the rule but encouraged market participants to provide their analyses of the proposal and any accompanying data. Commissioner Elisse Walter echoed this request by calling on interested parties to not only provide their view on the proposal but to also discuss any alternatives and relevant data.
Although he voted in favor of the rule, Commissioner Luis Aguilar questioned whether the net capital requirements for SBSDs and major SBS participants were sufficient to adequately safeguard the financial stability of those entities. Notably, Aguilar also questioned whether the capital of these entities would be adequately safeguarded when margin is not collected from commercial end users.
Finally, Commissioner Daniel Gallagher asked when the SEC’s proposal addressing the extraterritorial application of Title VII regulations (cross border document) would be released. Robert Cook, Director of the SEC’s Division of Trading and Markets said significant efforts are underway to put out a comprehensive document in the “short-term.” He noted that the SEC would be conducting meetings with U.S. and foreign regulators over “the next month or so” to identify any emerging gaps with regard to the implementation of new regulatory regimes. Cook added that today’s capital and margin rules mark the end of the SEC’s Title VII proposal phase and said the cross border document will be the capstone to those rules.
For a webcast of the meeting, please click here.