Tag: Derivatives


SEC and CFTC Turn to Swaps and Security-Based Swaps Enforcement

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

The week of June 15, 2015 saw two of the first publicly announced enforcement actions brought by the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) to enforce security-based swap and swap regulatory requirements under Title VII of the Dodd-Frank Act. The SEC accepted an offer of settlement from a web-based “exchange” for, among other things, offering security-based swaps to retail investors in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. In a separate action, the CFTC obtained a federal court order against a Kansas City man in a case alleging violations of the antifraud provisions of the swap dealer external business conduct rules in Part 23 of the CFTC regulations. [1] Swap dealers and security-based swap market participants may wish to consider these orders and the agencies’ approach to enforcement as firms further develop, review and update their compliance programs.

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SEC Re-Proposes Rules on Arranging, Negotiating or Executing Security-Based Swaps

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum; the complete publication, including appendices, is available here.

On May 13, 2015, the SEC published proposed amendments and re-proposed rules on the application of certain Title VII requirements to cross-border security-based swap activities of non-U.S. persons based on U.S. conduct. The proposed rules would modify numerous prior SEC proposals and final rules, including the May 2013 proposed rules on the cross-border application of security-based swap regulations, the August 2014 final cross-border definitions and de minimis rules and the March 2015 reporting final rules. [1]

Notably, the proposed rules would:

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Proposed Rules for US and Non-US Person’s Security-Based Swaps Dealing

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent public statement, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

During the financial crisis, the world witnessed how financial contracts known as swaps played a key role in creating a global financial hurricane. These financial contracts tied together the destinies of seemingly unrelated financial firms. The threat of a daisy chain of failures drove bailouts to companies no one dreamed would ever be risky. What’s more, the crisis and bailouts flooded across international borders. Indeed, over half of the largest recipients of the AIG bailouts were foreign organizations. [1]

Following the crisis, policymakers around the world committed to stop this from happening again. The resulting reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), directed the Securities and Exchange Commission (“Commission”) and its fellow regulators to bring the swaps marketplace into the light and to make it resilient enough to weather the next storm.

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Focusing on Dealer Conduct in the Derivatives Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The financial crisis of 2008 demonstrated the devastating effects of a derivatives marketplace that, left unchecked, seriously damaged the world economy and caused significant losses to investors. As a result, Title VII of the Dodd-Frank Act tasked the SEC and the CFTC to establish a regulatory framework for the over-the-counter swaps market. In particular, the SEC was tasked with regulating the security-based swap (SBS) market and the CFTC was given regulatory authority over all other swaps, such as energy and agricultural swaps.

The Commission has already proposed and/or adopted various rules governing the SBS market— such as rules that establish standards for registered clearing agencies; rules to move transactions onto regulated platforms; rules to bring transparency and fair dealing to the market for SBS; rules for the registration of dealers and major participants; rules to impose capital, margin, and segregation requirements for dealers and major participants; and rules for cross-border SBS activities.

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SEC Implements Dodd-Frank Reporting and Dissemination Rules for Security-Based Swaps

The 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.

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SEC’s Swaps Reporting and Disclosure Final Rules

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Troy Paredes, Samuel Crystal, and David Kim.

On February 11, 2015, the Securities and Exchange Commission (SEC) released two final rules toward establishing a reporting and public disclosure framework for security-based swap (SBS) transaction data. The SEC’s Commissioners had voted in January to approve the rules, 3 to 2. [1] These rules are the SEC’s first substantive SBS requirements since the SEC began laying out its cross-border position through final rules in June 2014. [2] Chair White has consistently stressed the need to complete substantive SBS requirements and now appears willing to do so even when the SEC Commissioners are divided.

The SEC rules diverge from existing Commodity Futures Trading Commission (CFTC) requirements in some key ways. These divergences will create technical complexity for dealers who have built systems and processes to meet already live CFTC regulations. For example, the SEC’s broader, more exhaustive, and possibly repetitive scope of “Unique Identifier Codes” (UIC) will be problematic for market participants. A less obvious problem will be the SEC’s requirement to report SBS data within 24 hours (until modified by the SEC as the rule suggests), as dealers will likely want to delay public dissemination for as long as possible which will run counter to their existing set-ups for the CFTC requirement to report to a swap data repository (SDR) “as soon as technologically practicable.”

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Chairman’s Address at SEC Speaks 2015

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at the Practising Law Institute’s SEC Speaks in 2015 Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

By every meaningful measure, 2014 was a year of significant accomplishment across all of the agency’s areas of responsibility. The year was highlighted by the completion of several transformative rulemakings, including new policy reforms to address faults exposed during the financial crisis and initiatives to better address vulnerabilities in the resiliency and integrity of our markets. It was also an unprecedented year in enforcement, in terms of the number of cases and, more importantly, their subject matter. We made important strides in our review and action plans for optimizing the structure of our equity and fixed income markets, enhancing our risk supervision of the asset management industry and bolstering the effectiveness of public company disclosure. We also significantly strengthened our examination coverage of market participants. But, as always, we have more to do and expect a very busy 2015.

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Setting Forth Goals for 2015

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent address at the Practising Law Institute’s SEC Speaks in 2015 Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

During the past seven years, the SEC has taken action on a significant number of issues. There is little doubt, that these years have been one of the most active periods in SEC history. For example, during this period, the Commission voted on almost 250 rulemaking releases, both proposing rules and adopting final rules. Many of these rulemakings have been ground-breaking.

Still, even with all that activity, the SEC has not finished its work on many ongoing issues, such as the need to improve disclosures related to target-date funds and municipal securities. The Commission also has not completed many of its outstanding statutory mandates. I plan to use my time with you today [February 20, 2015] to lay out a few important priorities that the SEC should pursue in 2015 in order to move toward completing its outstanding work, to strengthen the Commission and do right by the public.

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Addressing the Lack of Transparency in the Security-Based Swap Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [January 14, 2015], the Commission considers rules that are designed to address the lack of transparency in the security-based swaps (SBS) market that substantially contributed to the 2008 financial crisis. These rules are the result of the Congressional mandate in the Dodd-Frank Act, which directed the SEC and the CFTC to create a regulatory framework to oversee this market.

The global derivatives market is huge, at an amount estimated to exceed $692 trillion worldwide—and more than $14 trillion represents transactions in SBS regulated by the SEC. The continuing lack of transparency and meaningful pricing information in the SBS market puts many investors at distinct disadvantages in negotiating transactions and understanding their risk exposures. In addition, as trillions of dollars have continued to trade in the OTC market, there is still no mandatory mechanism for regulators to obtain complete data about the potential exposure of individual financial institutions and the SBS market, in general.

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Key Points from Congress’s Roll-Back of the Swaps Push-Out

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Armen Meyer, and David Kim.

On December 13, 2014, the US Senate passed an appropriations bill for the President’s signature that included a provision to roll back much of Dodd-Frank’s section 716 (i.e., the Swaps Push-Out). The initial version of the Swaps Push-Out was proposed by Senator Blanche Lincoln (Democrat of Arkansas) in 2010, during her re-election campaign, and would have prohibited bank swap dealers from receiving federal assistance from the FDIC or from the discount window of the Federal Reserve. After intense negotiation in the last days of congressional debate on Dodd-Frank, Lincoln’s version was substantially narrowed to only prohibit banks from dealing in swaps that were viewed by Congress as the most risky.

The Swaps Push-Out that ultimately passed as part of Dodd-Frank prohibited bank swap dealers (with access to FDIC insurance or the discount window) from dealing in certain swaps (or security-based swaps), including most credit default swaps (CDS), equity swaps, and many commodity swaps. Swaps related to rates, currencies, or underlying assets that national banks may hold (e.g., loans) were allowed to remain in the bank, as were swaps used for hedging or similar risk mitigation activities.

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