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.

As part of this process, the specific focus of today’s rules involves the conduct and activities of the dealers that dominate the global derivatives market—a $692 trillion market of which more than $14 trillion represented transactions in security-based swaps. In particular, today’s rules address the cross-border activities of those dealers.

When we adopted our final rules last year on the cross-border activities of SBS dealers and major participants, the Commission indicated that it would re-propose the rules defining the phrase “transaction conducted within the United States,” a key definition addressing what dealer conduct would be covered under Title VII. Accordingly, the Commission today considers Re-Proposed Rules addressing, among other things, the application of the de minimis exception to the dealing activity of non-U.S. persons located in the U.S., and the application of Regulation SBSR to such transactions. The Commission is also re-proposing a rule regarding the application of the external business conduct requirements to the foreign business and U.S. business of registered SBS dealers.

Specifically, today’s rules focus on the activities of SBS dealers and take into account the activity of non-U.S. firms with personnel in the U.S. that are engaged in arranging, negotiating, or executing SBS transactions. In particular, these rules include two main requirements. First, the rules require non-U.S. persons to include their dealing transactions in their de minimis calculations. If these dealing transactions exceed the de minimis threshold, the non-U.S. person will need to register with the SEC as a dealer and be subject to several statutory requirements, including capital, margin, and business conduct requirements. Second, the rules would trigger the application of the external business conduct rules applicable to dealer activities, as described in the Re-Proposed Rules.

By targeting SBS dealing activities, the Re-Proposed Rules would result in approximately 99% of all SBS activities occurring within the United States falling under the regulatory umbrella of our Title VII rules. As stated in today’s release, the SBS activities that would not be covered involve non-dealer transactions between non-U.S. persons and are not thought to pose significant risks to the U.S. financial system.

The Re-Proposed Rules being considered today would enhance Commission oversight, market transparency, and investor protection in several ways:

  • First, the rules ensure that all dealers conducting business in the U.S. are registered with the Commission, and are covered by the external business conduct rules, which are rules that set forth standards for dealers to live up to in their dealings with their counterparties—such as employee benefit plans, endowments, federal agencies, and states.
  • Second, the rules will capture a significant number of foreign dealers conducting business in the U.S., a feature that is crucial given that approximately 88% of global SBS transactions involved non-U.S. counterparties.
  • Third, the rules are designed to prevent restructuring charades to avoid Title VII—for example, by plugging the loopholes allowing registered SBS dealers to book transactions overseas but otherwise handle the transactions in the U.S. This will prevent dealers from accumulating hidden risks that could ultimately be borne by the U.S. financial system.
  • Finally, the rules require public dissemination of all dealing transaction data and not just those that relate to dealing transactions in the U.S. This will improve transparency and oversight of SBS transactions.

Today’s rules recognize the central role that dealers play in SBS transactions and are positive steps toward plugging regulatory gaps and loopholes. We must ensure that our Title VII rules work effectively to provide the much-needed transparency and protection that will ultimately benefit our investors, our capital markets, and our economy.


I will support today’s recommendation. It is a necessary step forward. Nonetheless, I recognize that the SEC still lags behind the CFTC in adopting all the necessary rules for the SBS market, as required by Title VII of the Dodd-Frank Act. Accordingly, I urge my fellow Commissioners to move with urgency and adopt the rest of the long-overdue Title VII rules. These rules are needed to increase transparency in the derivatives market, promote accountability, reduce systemic risk, and prevent future financial crises.

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