Implementation of Title VII of Dodd-Frank: SEC Issues Proposed Rules to Mitigate Potential Conflicts of Interest in the Operation of Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities and Security-Based Swap Exchanges and an Interim Final Temporary Rule Regarding Reporting of Pre-Enactment Security-Based Swap Transactions

Sullivan & Cromwell LLP - October 20, 2010
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The SEC recently issued proposed rules and an interim final temporary rule in connection with its implementation of Title VII of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In the first action, the SEC acted upon the authority granted to it under the Dodd-Frank Act to mitigate conflicts of interest in the operation of security-based swap clearing agencies, security-based swap execution facilities and national securities exchanges or facilities thereof that post or make available for trading security-based swaps through limits on the ownership of voting equity and the exercise of voting power with respect to such entities, as well as the adoption of other structural governance requirements. In the second action, the SEC issued an interim final temporary rule establishing a reporting requirement for security-based swaps that were entered into before the date of enactment of the Dodd-Frank Act and had not expired before such date.

On October 1, 2010, the CFTC took similar action with respect to conflicts of interest in the operation of derivatives clearing organizations, designated contract markets and swap execution facilities, and reporting requirements for pre-enactment swap transactions. The CFTC’s proposed rules with respect to conflicts of interest are substantially similar to the SEC’s proposed rules except for limitations on equity ownership by certain types of entities (regardless of whether they are members of the clearing organization in question) and the required number of independent directors. The CFTC’s proposed interim final rule with respect to the reporting of pre-enactment swaps is substantially the same as the SEC’s interim final temporary rule. For a discussion of the CFTC actions, please see our memorandum to clients, dated October 8, 2010, entitled “CFTC Issues Proposed Rule under the Dodd-Frank Act on Financial Resource Requirements for DCOs and SIDCOs, as well as a Proposed Rule to Mitigate Potential Conflicts of Interest in the Operation of DCOs, DCMs and SEFs and an Interim Final Rule Regarding Reporting of Pre-Enactment Swap Transactions.”