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E-MailThe following post comes to us from Arthur S. Long, partner in the Financial Institutions and Securities Regulation practice groups at Gibson, Dunn & Crutcher LLP, and is based on the introduction of a Gibson Dunn publication; the complete publication, including footnotes and charts, is available here.
Implementation of the derivatives market reforms contained in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) may fairly be characterized as a herculean effort. The Commodity Futures Trading Commission (CFTC) has finalized dozens of new rules to implement Title VII’s provisions governing “swaps.” Although Title VII requires the Securities and Exchange Commission (SEC or Commission) to implement similar provisions for “security-based swaps” (SBSs), the SEC’s rulemaking process has lagged the CFTC’s.
Earlier this year, the SEC finalized two of its required rules: one (Final Regulation SBSR) governs the reporting of SBS information to registered security-based swap data repositories (SDRs) and related public dissemination requirements; the other covers the registration and duties of SDRs (SDR Registration Rule). Additionally, the SEC published a proposed rule to supplement Final Regulation SBSR that addresses, among other things, an implementation timeframe, the reporting of cleared SBSs and platform-executed SBSs, and rules relating to SDR fees (Proposed Regulation SBSR). Comments on Proposed Regulation SBSR must be submitted to the SEC by May 4, 2015.
This post focuses on Final Regulation SBSR and Proposed Regulation SBSR, which create a reporting and public dissemination regime for market participants that engage in SBSs akin to Parts 43, 45 and 46 of the CFTC’s swap regulations. We discuss the key aspects of these rules and how they will affect SBS market participants. Because many market participants have already gone through the implementation process with respect to the CFTC’s swap reporting rules, we also discuss some of the key differences between Final Regulation SBSR and the final CFTC reporting rules: a comparison of the SEC and CFTC rules is contained in a chart at the end of the full publication, available here.
Overview
Under the Dodd-Frank Act, the CFTC has jurisdiction over foreign exchange, interest rate, and other commodity derivatives, as well as credit default and equity derivatives based on indices, two or more loans, and a broad-based (10 or more) group of securities. The SEC’s jurisdiction is limited to credit default and equity derivatives based on a single security or loan or a narrow-based (9 or fewer) group or index of securities (including any interest therein or the value thereof), or events relating to a single issuer or issuers of securities in a narrow-based security index.
Section 763 of the Dodd-Frank Act added Section 13A and 13(m) to the Securities Exchange Act of 1934 (Exchange Act) and authorized the SEC to promulgate rules relating to the reporting and public dissemination of SBS transaction data. Exchange Act Section 13A authorizes the SEC to promulgate rules regarding the reporting of SBS transaction and pricing data to registered SDRs. Exchange Act Section 13(m)(1) authorizes the SEC to promulgate rules regarding the public dissemination of SBS transaction and pricing data.
On January 14, 2015, the SEC, by party-line votes of 3-2, adopted Final Regulation SBSR, the SDR Registration Rule and Proposed Regulation SBSR. Commissioner Daniel M. Gallagher issued a dissenting statement noting that the proposal was not yet “ready for prime time” as the final release was “replete with references to anticipated future rulemaking.” Commissioner Michael S. Piwowar echoed Commissioner Gallagher’s concerns and stated that the rules were hastily adopted “in order to achieve ideological ends without sufficient justification.”
The SEC’s rules establish a two-step process that allows for the reporting of SBS data for use by regulators and for the dissemination of transaction and pricing data to the public in real time. Final Regulation SBSR places a reporting obligation on one party to an SBS transaction to provide detailed information about such transaction to an SDR. Final Regulation SBSR next requires the SDR to disseminate that information to the public in real time after such information is received.
The complete publication, including footnotes and charts, is available here.
