SEC Adopts Rule Defining Swaps -Related Terms for Regulating Derivatives
On April 18, the SEC held an Open Meeting where the following rulemakings were presented and approved:
- Joint Final Rules for the definitions of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant.”
The Securities and Exchange Commission (SEC) unanimously voted in favor of the joint entity definitions rule. The Commodity Futures Trading Commission (CFTC) approved the rule by a vote of 4 to 1 during a concurrent Open Meeting today.
In her opening statement, SEC Chairman Mary Schapiro said the SEC believes “that both the $3 billion de minimis threshold and the $8 billion phase-in level for credit default swaps (CDS) ensure that the vast majority of notional dealing activity in this market is subjected to the SEC’s Title VII dealer regulatory regime, consistent with the statutory de minimis exception.”
Schapiro said the SEC is “very aware of the importance of providing market participants with an implementation roadmap and ‘rules of the road’ for cross-border issues before requiring dealer and major participant registration.”
In his statement, Commissioner Troy Paredes complimented staff for crafting the phase-in for setting the de minimis threshold for the “security-based swap dealer” definition. Parades said the phase-in “reflects a measured approach that enables the Commission to continue evaluating where the de minimis line should be drawn with the benefit of what we learn from how the security-based swap market develops under the new regulatory regime.”
In his statement, Commissioner Luis Aguilar said that while he had been concerned that the $3 billion de minimis threshold amount “is 30 times higher than the $100 million figure that was originally proposed,” he is “persuaded by numerous conversations with the staff that, based on the limited information currently available, the rule’s de minimis provisions are reasonable.” Focusing on the rule’s required study of the regulatory regime, Aguilar said it should also “consider the impact on all participants in the market and on the financial system and the economy as a whole.”
Final Rules Regarding Further Defining “Swap Dealer,” “Major Swap Participant,” “Security-Based Swap Dealer,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant”
The final rule provides guidance on helping market participants determine whether registration is required and implements the statutory tests used to make those determinations. The rule defines the term “security-based swap dealer” as someone who: holds themselves out as a dealer in security-based swaps; makes a market in security-based swaps; regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account; engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps. The term does not include a person who enters into security-based swaps for their own account “not as a part of a regular business.”
The de minimis threshold for CDS that are security-based swaps (SBS) is $3 billion in notional CDS dealing transactions over the previous 12 months. The threshold for other types of SDS is $150 million. The threshold for SBS with special entities, e.g. employee benefit plans and municipalities, is $25 million in notional amount over the previous 12 months. The threshold will be phased-in over time with registration requirements only applying to entities and individuals who transact $8 billion or more worth of CDS dealings transactions over the previous 12 months. The phased-in level for other types of SBS is $400 million. The phase-in levels will be terminated after the SEC completes a report on the security-based swap market unless the SEC establishes a new threshold.
Positions held for hedging or mitigating commercial risk would not be subject to the rules. The definition for “hedging or mitigating commercial risk” includes any SBS position that is appropriate to reduce risk in the conduct and management of a business, where the risk arises in the ordinary course of business from a potential change in the value of: assets that a person owns, produces, manufactures, processes, or merchandises; liabilities that a person incurs; and services that a person provides or purchases. Market participants would not have to assess the effectiveness of a hedging position or document such an assessment.
Under the rule, the SEC staff must report to the Commission on whether changes should be made to the entity definition rules no later than the three years following the later of: the last compliance date for the registration and regulatory requirements for security-based swap dealers and major security-based swap participants; the first date on which compliance with the trade-by-trade reporting rules for credit-related and equity-related security-based swaps to a registered security-based swap data repository is required.
The final rule takes effect 60 days after its publication in the Federal Register. Dealers and major participants must register when the SEC finalizes the rules for the registration of dealers and major participants.
For a fact sheet of the final rule prepared by the SEC, please click here.
On April 18, the SEC held an Open Meeting where the following rulemakings were presented and approved:
- Joint Final Rules for the definitions of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant.”
The Securities and Exchange Commission (SEC) unanimously voted in favor of the joint entity definitions rule. The Commodity Futures Trading Commission (CFTC) approved the rule by a vote of 4 to 1 during a concurrent Open Meeting today.
In her opening statement, SEC Chairman Mary Schapiro said the SEC believes “that both the $3 billion de minimis threshold and the $8 billion phase-in level for credit default swaps (CDS) ensure that the vast majority of notional dealing activity in this market is subjected to the SEC’s Title VII dealer regulatory regime, consistent with the statutory de minimis exception.”
Schapiro said the SEC is “very aware of the importance of providing market participants with an implementation roadmap and ‘rules of the road’ for cross-border issues before requiring dealer and major participant registration.”
In his statement, Commissioner Troy Paredes complimented staff for crafting the phase-in for setting the de minimis threshold for the “security-based swap dealer” definition. Parades said the phase-in “reflects a measured approach that enables the Commission to continue evaluating where the de minimis line should be drawn with the benefit of what we learn from how the security-based swap market develops under the new regulatory regime.”
In his statement, Commissioner Luis Aguilar said that while he had been concerned that the $3 billion de minimis threshold amount “is 30 times higher than the $100 million figure that was originally proposed,” he is “persuaded by numerous conversations with the staff that, based on the limited information currently available, the rule’s de minimis provisions are reasonable.” Focusing on the rule’s required study of the regulatory regime, Aguilar said it should also “consider the impact on all participants in the market and on the financial system and the economy as a whole.”
Final Rules Regarding Further Defining “Swap Dealer,” “Major Swap Participant,” “Security-Based Swap Dealer,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant”
The final rule provides guidance on helping market participants determine whether registration is required and implements the statutory tests used to make those determinations. The rule defines the term “security-based swap dealer” as someone who: holds themselves out as a dealer in security-based swaps; makes a market in security-based swaps; regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account; engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps. The term does not include a person who enters into security-based swaps for their own account “not as a part of a regular business.”
The de minimis threshold for CDS that are security-based swaps (SBS) is $3 billion in notional CDS dealing transactions over the previous 12 months. The threshold for other types of SDS is $150 million. The threshold for SBS with special entities, e.g. employee benefit plans and municipalities, is $25 million in notional amount over the previous 12 months. The threshold will be phased-in over time with registration requirements only applying to entities and individuals who transact $8 billion or more worth of CDS dealings transactions over the previous 12 months. The phased-in level for other types of SBS is $400 million. The phase-in levels will be terminated after the SEC completes a report on the security-based swap market unless the SEC establishes a new threshold.
Positions held for hedging or mitigating commercial risk would not be subject to the rules. The definition for “hedging or mitigating commercial risk” includes any SBS position that is appropriate to reduce risk in the conduct and management of a business, where the risk arises in the ordinary course of business from a potential change in the value of: assets that a person owns, produces, manufactures, processes, or merchandises; liabilities that a person incurs; and services that a person provides or purchases. Market participants would not have to assess the effectiveness of a hedging position or document such an assessment.
Under the rule, the SEC staff must report to the Commission on whether changes should be made to the entity definition rules no later than the three years following the later of: the last compliance date for the registration and regulatory requirements for security-based swap dealers and major security-based swap participants; the first date on which compliance with the trade-by-trade reporting rules for credit-related and equity-related security-based swaps to a registered security-based swap data repository is required.
The final rule takes effect 60 days after its publication in the Federal Register. Dealers and major participants must register when the SEC finalizes the rules for the registration of dealers and major participants.
For a fact sheet of the final rule prepared by the SEC, please click here.