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SEC Open Meeting

Security Exchange Commission

Open Meeting

Wednesday, April 6, 2022

Topline

  • The Commission unanimously approved the proposed rules relating to security-based swap execution and registration and regulation of security-based swap execution facilities.
  • Comments are due 30 days after publication in the Federal Register or June 6 (which is 60 days after issuance), whichever is later.

ITEM 1: Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities

The Commission unanimously approved proposed rules under the Securities Exchange Act of 1934 for the registration and regulation of security-based swap execution facilities (“SBSEFs”) and related matters. The proposed rules would also address the cross-border application of registration and execution requirements for security-based swaps. Additionally, the Commission considered whether to propose rules designed to mitigate conflicts of interest at (SBSEFs) and national securities exchanges that trade security-based swaps.

Staff Discussion
Haoxiang Zhu introduced the new proposed rules relating to security-based swap execution and registration and regulation of security-based swap execution facilities. He then discussed security-based swaps and their use. He recommended that SBSEFs rules harmonize closely with the Commodity Futures Trading Commission (CFTC) rules adopted in 2013 that govern transactions in broad-based swaps contracts.

Michael Gaw stated that the proposed rules would implement requirements under Title VII of the Dodd Frank Act relating to SBSEFs and security-based swap execution generally, including the fourteen core principles found in Section 3D of the Securities Exchange Act. He emphasized that the recommendations are premised with close harmonization with parallel CFTC rules. He then discussed each proposed rule and how they would be parallel with the CFTC rules. He recommended proposing amendments to existing rule 3a1-1 of the Securities Exchange Act to exclude from the definition of exchange registered SBSEFs and security-based swaps clearing agencies that perform certain matching and execution functions as part of their process for establishing end-of-day marks for marketing purposes. He next discussed new rule 15a-12 under the Securities Exchange Act, stating it would deem a registered SBSEFs that limits its securities activities to facilitate the trading of security-based swaps also to be registered with the Commission as a broker and exempt the SBSEF from all broker requirements except for three enumerated sections of the Securities Exchange Act. Lastly, he recommended the Commission propose new rules and amendments to the Commission’s Rules of Practice that would allow a person to make a request to the Commission to review a SBSEFs actions when it exercises its regulatory functions over its market and members.

Jessica Wachter began by reiterating that today’s proposed new rules will be harmonized as closely as practicable with the CFTC rules covering security-based swap execution facilities. She then discussed security-based swaps and how they operate. She concluded by discussing the cost of the new proposed rules and how direct costs can and will be mitigated by entities who register as SBSEFs.

Commissioner Discussion

Commissioner Hester Peirce said creating a framework for the registration of security-based SEFs, based upon the fourteen core principles for these entities spelled out in the Dodd-Frank Act, and harmonizing the framework promulgated by the CFTC make sense. She then asked staff a few questions related to market trading, barring people who have been convicted of felonies from trading, the “trading facilities” term’s impact on other rules within the Commission’s rulebook, and broker obligations.

Commissioner Allison Herren Lee said the new proposed rules will allow the Commission to further implement Title VII of the Dodd-Frank Act as it relates to SBSEFs. She then discussed the new proposed rules and the goals of Tile VII to promote competition by increasing trading on platforms.

Commissioner Caroline Crenshaw said a guiding principle behind the proposed new rules being considered is harmonization with the CFTC’s regulatory regime for swap execution facilities (SEFs), adding that harmonizing with the CFTC to the extent possible should help minimize the costs of compliance for SEFs. She then discussed how the security-based swap market is distinct from the swap market. She said given the distinctions in the markets, there may be instances where differences in the SEC’s statutory authority or differences in the SBS market relative to the swap market may necessitate differences between the Commission’s rules and the CFTC’s. She concluded by saying the Commission should leverage the benefits of the Legal Entity Identifier (LEI) by incorporating it into their forms and filings wherever appropriate.

Commission Chair Gary Gensler said the proposal would do two key things, including creating a framework for the registration of security-based SEFs, based upon the fourteen core principles for these entities spelled out in the Dodd-Frank Act, and partially implementing Section 765 of the Dodd-Frank Act, which mandated that the Commission promulgate rules designed to mitigate conflicts of interest at security-based SEFs, security-based swap exchanges, and security-based swap clearing agencies. He added the proposed rule partially implementing Section 765 of the Dodd-Frank Act related to security-based SEFs and exchanges is designed to promote competition and market integrity. He concluded saying the proposed new rules build upon the Commission’s existing efforts to strengthen transparency and integrity in the security-based swap market.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.