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SEC Proposes Rules to Outline Obligations of Security-Based Swap Repositories


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Washington, D.C., Nov. 19, 2010 — The Securities and Exchange Commission today voted unanimously to propose new rules that would require security-based swap data repositories (SDRs) to register with the SEC. The proposed rules also lay out other requirements with which SDRs must comply.

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act generally authorizes the SEC to regulate security-based swaps. The SEC's proposal aims to increase accountability and transparency in the security-based swap market, and ensure these repositories retain and maintain complete records of security-based swap transactions that can be accessed by regulators.

"The need for these repositories stems from the opaque nature of the swaps market — a market where transaction-level data has not been widely available or required to be recorded," said SEC Chairman Mary L. Schapiro. "These repositories have a crucial role to play in the development of a healthy and robust security-based swap market."

The SEC is seeking public comment on the proposed rules for a period of 45 days following their publication in the Federal Register.

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Creating Security-Based Swap Repositories:

The Dodd-Frank Wall Street Reform and Consumer Protection Act establishes a comprehensive framework for regulating the over-the-counter swaps markets. Among other things, Title VII of the Act authorizes the Commission to regulate security-based swaps and to take steps to encourage accountability and transparency in this market.

In an effort to enhance such transparency, Congress established centralized recordkeeping facilities, known as security-based swap data repositories. The purpose of these repositories is to retain complete records of security-based swap transactions, maintain the integrity of those records, and provide effective access to those records to relevant authorities.

The enhanced transparency provided by an SDR also helps regulators and others monitor the build-up and concentration of risk exposures in the security-based swap market.

The data maintained by an SDR may also assist regulators in:

  • Preventing market manipulation, fraud, and other market abuses.
  • Performing market surveillance, prudential supervision, and macroprudential (systemic risk) supervision.
  • Resolving issues and positions after an institution fails.

Section 763(i):

One section of the Dodd-Frank Act — Section 763(i) — lays out the requirements and core principles with which security-based swap repositories are required to comply, including registering with the Commission. This section also provides the Commission with broad authority to adopt rules governing SDRs.

The Commission proposed rules to implement this provision. The rules would govern the registration process, core principles, and duties of an SDR. These include duties related to maintaining data as well as guidelines as to when and how a repository's data could be accessed.

The Proposal

The proposed rules (numbered 13n-1 through 13n-11) establish a registration process for SDRs and require SDRs to comply with certain duties and core principles.

Among other things, the proposed rules would require that SDRs:

  • Register with the Commission by filing a new Form SDR, and to update the filing when the information becomes inaccurate. The rules also would provide a process for the Commission to cancel or revoke the registration of an SDR.
  • Provide the Commission access to security-based swap data, provide reports to the Commission relating to this data, and provide security-based swap data to relevant authorities upon request.
  • Accept all security-based swaps reported to them (in asset classes that the SDR accepts).
  • Accept transaction data and maintain it for not less than five years after the expiration of the applicable swap, and to calculate positions and maintain them for not less than five years.
  • Adopt policies and procedures reasonably designed to: 1) resolve disputes over the accuracy of security-based swap data; 2) ensure that their automated systems provide adequate levels of capacity, resiliency, and security; and 3) protect the privacy of security-based swap transaction information, material non-public information, and intellectual property.

In addition, the rules would:

  • Require SDRs to make certain disclosures to a market participant prior to accepting any security-based swap data from that market participant.
  • Require an SDR's board of directors or a body performing a similar function to designate a chief compliance officer, who would be responsible for, among other things, preparing an annual compliance report, which must be filed with the Commission along with an annual audited financial report.

Other Regulators

Under the law, the SEC has authority over "security-based swaps," which are broadly defined as swaps based on a single security or loan or a narrow-based group or index of securities or events relating to a single issuer or issuers of securities in a narrow-based security index.

The Commodity Futures Trading Commission has primary regulatory authority over all other swaps. The CFTC and SEC share authority over "mixed swaps," which are security-based swaps that also have a commodity component.

The CFTC is proposing similar rules with respect to repositories for the swaps that would fall under their jurisdiction.

In addition to working closely with the CFTC in preparing this proposal, the SEC and the CFTC held a joint public roundtable to gain further insight into many of the issues addressed in the rules.

Recent Rulemaking

Under the Dodd-Frank Act, the Commission has been engaging in significant rulemaking:

  • Security-based swap fraud: Proposed a new rule to help prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap — as well as in connection with ongoing payments and deliveries under a security-based swap.
  • Security-based swap conflicts: Proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.
  • Reporting of pre-enactment security-based swaps: Adopted an interim rule that requires certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act. This rule applies only to such swaps whose terms had not expired as of July 21.
  • Asset-backed securities: Proposed rules that would enhance ABS disclosure by:
    • Requiring registered ABS issuers to perform a review of the bundled assets that underlie the ABS.
    • Requiring an ABS issuer to disclose the nature, findings and conclusions of this review of assets.
    • Requiring the issuer or underwriter for both registered and unregistered ABS offerings to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review.
  • Whistleblower: Proposed a whistleblower program, under Dodd-Frank provisions, that would reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.
  • Say-on-Pay: Proposed rules, under Dodd-Frank, that would enable shareholders to cast advisory votes on executive compensation and "golden parachute" arrangements.
  • Municipal advisor registration: Adopted a temporary rule requiring municipal advisors to register with the SEC as required by Dodd-Frank.

What's Next?

The proposal seeks public comment and data on a broad range of issues relating to the proposed rules, including the costs and benefits associated with the proposal. After careful review of comments, the Commission will consider whether to adopt the proposed rules or modify them.



Modified: 11/19/2010