Security-Based Swaps: SEC Proposes to Require Security-Based Swap Dealers and Major Security-Based Swap Participants to Provide and Verify Trade Acknowledgments in Security-Based Swap Transactions

Sullivan & Cromwell LLP - January 19, 2011

On January 14, 2011, the SEC proposed a rule that would require security-based swap dealers (“SBS Dealers”) and major security-based swap participants (“Major SBS Participants” and together with SBS Dealers, “SBS Entities”) to:

  • Provide Trade Acknowledgments. Provide counterparties in security-based swap (“SBS”) transactions (“SBS Transactions”) with trade acknowledgments (electronic records of the SBS Transactions) containing specified information.
  • Verify Trade Acknowledgments. Promptly verify the terms of any SBS Transactions entered into with other SBS Entities.
  • Policies to Obtain Verification of Trade Acknowledgments Sent. Establish and maintain policies and procedures reasonably designed to obtain prompt “verification” (defined as the process by which a trade acknowledgment is signed, whether manually, electronically or by some other legally equivalent means) from counterparties of the terms of any SBS Transactions.

An SBS Entity that purchases or sells an SBS Transaction would be required to provide the trade acknowledgment to the counterparty promptly, but in any event (i) for an SBS Transaction that is executed and processed electronically, within 15 minutes of execution, (ii) for an SBS Transaction that is not executed electronically, but is processed electronically, within 30 minutes of execution and (iii) for any SBS Transaction that cannot be processed electronically, within 24 hours following execution. All but one of the informational items that the proposed rule would require to be included in a trade acknowledgment would be required to be reported to a registered security-based swap data repository under proposed Regulation SBSR. In the case of an SBS Transaction cleared by a registered clearing agency, the proposed rule would deem the SBS Entity to have satisfied its trade acknowledgment obligation if the clearing agency through its facilities provides a confirmation of the SBS Transaction.

The proposed rule applies to SBS Transactions in which an SBS Entity “purchases” or “sells” an SBS. As amended by the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the terms “purchase” and “sale”, as applied to SBS Transactions, include any “execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap.”

The SEC has requested comments on all aspects of the proposed rule. Comments are due no later than than 30 days following the date of publication of the proposed rule in the Federal Register, which is expected imminently.