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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Security Based Swap Data Repository Registration, Duties and Core Principles and Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

SEC Open Meeting
Washington, D.C.
November 19, 2010

Thank you, Chairman Schapiro. I also want to thank the staff of Trading and Markets for their remarkable work on these releases. I'll say what I've said several times before: although Congress has tasked the agency with completing an unprecedented amount of rulemaking in an impossibly short amount of time, the staff is meeting the challenge. I continue to be impressed not just with the sheer volume of work the staff is doing, but with the care and thought that is going into that work. The two swap releases we are considering today certainly reflect that.

Congress has charged the SEC and CFTC with establishing the architecture for a more transparent and systemically robust market in swaps. The rules we are considering today represent key and foundational pieces of that architecture. Regulation SBSR, about which we will hear from the staff shortly, sets forth the proposed ground rules for the reporting of securities-based swap data and the dissemination of important market information to the public. The swap data repository rules about which we've just heard will establish the process for the registration of SDRs to which the swap data is likely to be reported, and sets forth the proposed duties of these SDRs. Taken together, these rules will provide the framework around which we hope a vibrant system of data reporting and dissemination will develop for the benefit of market participants and regulators.

But in developing this framework, we also need to be mindful that we are in large part creating a structure for a swaps market that doesn't yet exist. We can't just say: "Build it and they will come." Because if we build this infrastructure improperly, the market might not create or support swap data repositories, and if we don't get the rules right on real-time dissemination and block trade reporting, we may discourage productive economic activity or encourage it to move offshore. Such outcomes could undermine the worthy goals of improving transparency and reducing systemic risk.

The releases today reflect that understanding. Ultimately, we need to construct a model that encourages the development of robust SDRs, and a reporting and dissemination regime that ensures that critical market data gets to the market and to regulators but doesn't impair market quality. While the proposals draw on our experiences in the markets we traditionally have regulated, we are also appropriately sensitive that these different and more mature markets may not always be apt analogues to the swaps markets. I am very pleased that both releases acknowledge and ask questions about these differences, and importantly the need to understand the import and relevance of those differences as we develop this regulatory paradigm.

It is also critical to remember that our regulatory authority of the security-based swaps markets is continuous, and will not end when these and the other Title VII rules are completed. In other words, we can and should hone and improve the regulation of these markets as they develop and as we as regulators gain a better understanding of how these markets operate. What this argues for is a bit of regulatory incrementalism at the outset, so that we give effect to the requirements of the statute but avoid the temptation to impose regulatory restrictions before we as an agency gain the experience and collect the data necessary to make sound policy judgments.

While I think in the main the releases do an admirable job on this point, two examples in the SDR release give me some pause. First, although the Commission does not propose doing so, the release indicates that the Commission could require a whole host of governance and ownership restrictions on SDRs similar to those proposed for clearing and trading structures. We suggest this in spite of the fact that Dodd-Frank says nothing about SDR governance arrangements other than that they be transparent, and in spite of the fact that the Commission already has an array of regulatory tools at its disposal to minimize conflicts of interest within SDRs. This continues a trend of precipitous overreliance on the virtues of prescriptive ownership and governance rules before we even have SDRs up and running or have a clear basis to believe that they are necessary to manage and mitigate conflicts. Given the likely impact of such strictures on the development of these structures, we should have a firmer basis to believe such approaches are necessary or appropriate to addressing concerns about how conflicts may operate to undermine key regulatory objectives. This is an area where ultimately we should let experience in regulating SDRs, as well as CCPs and SEFs, going forward be our guide.

For similar reasons, I share the concern about Proposed Rule 13n-11(a), which would provide that the compensation and removal of the CCO would require the approval of the majority of the SDR's board. We are proposing this additional requirement even though Dodd-Frank doesn't require it, and even though Dodd-Frank prescribes a lengthy list of duties for the CCO, and even specifies his or her reporting relationship within the SDR. We offer no justification for this additional requirement other than in name of independence. It seems to me we owe more than a conclusion, but should seek to substantiate such judgments, particularly as here where we have chosen to go beyond what the law specifies. Again, while our experience in regulating SDRs may ultimately suggest the need for additional measures such as this to improve regulatory compliance, we should let the experience we actually obtain by regulating these entities inform those decisions.

Lastly, I am particularly interested in comments on the effect that the costs of these regulations will have. The staff estimates that the rules will impose an up-front cost of $401 million per SDR and an annual cost of $246 million per SDR. These numbers are significant, and raise concerns that these costs could operate to actually discourage the development of SDRs. If these concerns prove valid, it may be worth considering whether a scaled approach to building out this regulatory framework is appropriate or feasible, so that the regulatory cost doesn't inhibit the development of this critical function.

Despite these concerns, I think we have put forward on the whole two strong proposals, and I look forward to carefully considering the comments we receive. Again, Chairman Schapiro, I would like to thank the staff for their hard work and am pleased to support these releases today.


Modified: 01/11/2010