Security-Based Swaps: Recently Adopted and Proposed Rules under Title VII

Sullivan & Cromwell LLP - September 10, 2015
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In the first half of 2015, the Securities and Exchange Commission (the “SEC”) finalized or proposed a number of rules relating to security-based swaps (“SBSs”).  These include final and proposed rules on the reporting and public dissemination of security-based swaps, proposed rules on security-based swap transactions arranged, negotiated or executed by U.S.-based personnel of a non-U.S. person and final rules on the registration of security-based swap data repositories (“SDRs”).  This update provides an overview of these regulatory developments.

Regulation SBSR

In January 2015, the SEC adopted Rules 900 through 909 of Regulation SBSR (“Regulation SBSR”) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Regulation SBSR requires the reporting of certain SBS transaction, volume and pricing information to an SDR within 24 hours after execution of the relevant transaction, or the occurrence of certain “life cycle events.”  Certain of the reported information will then be publicly disseminated by the applicable SDR.  Regulation SBSR also requires SBS dealers (“SBSDs”) and major SBS participants (“MSBSPs”) to establish and maintain policies and procedures reasonably designed to ensure compliance with their reporting obligations.  The SEC also proposed a new compliance schedule with regard to the implementation of Regulation SBSR.

The SEC has in two different releases proposed rules and amendments to Regulation SBSR and requested comment on these new proposals.  The proposed additions in the first release would:

  • require a registered clearing agency to report to an SDR any SBS to which it is counterparty;
  • require trading platforms to report to an SDR any SBS that has been executed on such platforms and submitted for clearing; and
  • prohibit SDRs from charging fees to, or imposing usage restrictions on, the SBS transaction data that such entities are required to publicly disseminate. 
In the second release, the SEC proposed for comment additional rules that would expand the scope of reportable and publicly disseminated SBS transactions to include:
  • transactions by a non-U.S. party in connection with its SBS dealing activity that are arranged, negotiated, or executed by its personnel located in a U.S. branch or office, or by personnel of its agent located in a U.S. branch or office;
  • transactions executed on a platform having its principal place of business in the United States; and
  • transactions effected by or through a registered broker-dealer (including a registered SBS execution facility).
Cross-Border Security Based Swap Activities

On April 29, 2015, the SEC issued a release with proposed rules, amendments and interpretations relating to certain cross-border SBS activities under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  The release was published in the Federal Register on May 13, 2015.

The proposing release sought to extend certain aspects of the Title VII regulatory regime to SBS transactions that are arranged, negotiated or executed by personnel of a non-U.S. person located in a U.S. branch or office, or by the personnel of the non-U.S. person’s agent located in a U.S. branch or office, in either case in connection with the non-U.S. person’s SBS dealing activity.  The SEC’s approach in the proposing release is narrower than its approach in its proposing release of May 2013, in which it had proposed to extend Title VII requirements for SBSs to a broader category of “transactions conducted within the United States.”
 
Among other things, the proposing release addresses:
  • the circumstances under which a non-U.S. person, in applying the de minimis exception to the SBSD registration, must include transactions that are arranged, negotiated or executed by personnel of the non-U.S. person located in a U.S. branch or office, or by the personnel of the non-U.S. person’s agent located in a U.S. branch or office;
  • the treatment of SBS transactions that a non-U.S. person enters into anonymously on an execution facility or national securities exchange and that are cleared through a clearing agency;
  • the application of proposed external business conduct standards to the foreign business and the U.S. business of registered SBSDs;
  • the application of mandatory clearing and trade execution requirements to transactions connected with a non-U.S. person’s SBS dealing activity that are arranged, negotiated or executed by personnel of the non-U.S. person located in a U.S. branch or office, or by the personnel of the non-U.S. person’s agent located in a U.S. branch or office; and
  • “substituted compliance” procedures by which certain SBS market participants may comply with regulatory reporting and public dissemination obligations under Title VII by complying with comparable non-U.S. regulatory regimes that are applicable to those participants.
SDR Registration

The SEC adopted new rules under the Exchange Act governing, and a new form for registration of, SDRs (the “SDR Rules”).  Once registered, SDRs will act as centralized recordkeeping facilities—collecting and storing SBS data—and will be subject to a comprehensive regulatory framework.