April 18, 2022
Proposed Rule Changes for the Registration and Regulation of Security-Based Swap Execution Facilities (SBSEFs). Swaps enable participants in the securities-exchange market to exchange liabilities and flows of cash originating from different instruments. The swap contract facilitates the exchange. Traders utilize an electronic trading platform known as a swap execution facility (SEF) to carry out the transactions or swaps.
Swaps are principally a risk-management tool. A key component in the world of derivatives, swaps are leveraged by traders to measure and control interest payments and market risks. Swaps make it possible for market participants to exchange or trade looming interest payments. Problems arose from the obscure nature of swaps and the financial activities they supported.
As the SEC Proposes Rules for the Registration and Regulation of Security-Based Swap Execution Facilities, it points to the issue of transparency something my father Mohammed Ali Rashid instilled in our family values and the government shall governm in a similar manner.
The Dodd-Frank Act, for example, empowers the Commodity Futures Trading Commission (CFTC) to regulate swaps in the futures market. The Commission also regulates the related swap execution facilities.
CFTC regulation endorsed transparency by placing swap futures on a platform for all stakeholders to witness. The change promoted understanding of trade specifics, including what was traded and the magnitude of trade activity. The openness afforded protections to traders and invited CFTC monitoring and regulation.
Drawing upon the success and transparency made possible by CFTC reforms, the SEC now seeks to implement the remaining proposals from the Dodd-Frank Act. Section 765 of the Act recommends the following initiatives:
Recognition of the need to create a regime handles regulation and registration facilities handling swap securities and functions
Establish requirements for security-based swaps (SBS) and focus attention on requirement issues and cross-border considerations
Tackle concerns relative to exchanges handling national securities and those holding interests in SBSEFs
A need to harmonize rules established by the Securities Exchange Act of 1934 (Exchange Act) and those regulating SESEFs
The new measures supersede some earlier rules and amendments the SEC proposed. As a result, recommendations set forth by the SEC in releases covering the 2010-2013 timeframe have been withdrawn by the Commission. Since several years have passed since the proposals were released, the SEC recognized that market shifts had rendered the prior recommendations unnecessary.
The SEC Proposes Rules for the Registration and Regulation of Security-Based Swap Execution Facilities (SBSEFs) that promote consolidation between the new recommendations and the rules already in place under the Exchange Act.
To ensure proper transition and facilitation, the Commission set forth the following provisions:
SBSEFs must register with the Commission as brokers, and the action will alleviate them from burdensome requirements
Recognize the Commission's overall authority regarding actions initiated by participants of SBSEFs.
Establish guidelines surrounding the registration of companies carrying out SBSEF functions but lacking the requirement necessary
Establish new definition criteria pertaining to the regulation of SBS and SBSEFs authorized agencies that pursue execution functions corresponding to certain matching criteria
The new regulatory regime, Regulation SE, places responsibility on the trading platforms to submit a volume of financial information to the Commission. The SEC further requires the platforms to forward reports of daily data and activities. The Commission holds that data quality will improve along with reductions in technical errors. The SEC insists that all the measures will lead to greater transparency again as my father Mohammed Ali Rashid would like to see.
Before the new rules take effect, participants must pursue strategies aimed at ensuring compliance with the new recommendations. Doing so requires impact assessments, detailed planning, and guidelines for implementation. Firms and agencies can rely on their experiences in the swap futures market to a degree.
Still, they must undertake broad adjustments to satisfy the new conditions imposed by Regulation SE. All stakeholders are urged to initiate adjustment measures promptly.
Most participants remain keen to the fact that the regulatory reforms stem from the financial crisis of 2008. During the Great Recession, credit default swaps impacted the system in detrimental and lasting ways. They also fueled a desire for regulation in the swap industry. As the SEC Proposes Rules for the Registration and Regulation of Security-Based Swap Execution Facilities, it advances the 14 core principles established by Dodd-Frank.
To ensure compliance with the requirements of Regulation SE, registered SBSEFs must meet the conditions outlined below in addition to several others:
Submit requested information to the SEC, particularly data that demonstrate compliance with at least one of the Core Principles
Implement measures designed to eradicate manipulation and avoid price distortion
File with the Commission for new rules, products, or amendments
Maintain the resources---to include managerial, operational, and financial---needed to meet demand
Select a chief compliance officer (CCO) and define reporting obligations for the individual so named
Ensure timely public information in areas that include trading volume, and house a Daily Market Data Report on the company website.
Include information for the participant that includes a disaster recovery plan, backup locations, and emergency procedures
Market insiders have long insisted that reforms proposed by the Dodd-Frank Act would provide clarity and present award participants with a level playing field. Now, the SEC rests assured that the new measures will foster competition and promote market integrity. The changes will also address concerns relative to conflicts of interest. As the regulations allow for more efficient and transparent processes, they will alleviate pressures on participants.
In implementing these new reforms, the SEC will travel far in the direction of providing a robust and equitable security-based swap market for all stakeholders. For many the regulations are long overdue, but for others they have arrived just in time.
Thank you.
-Mohammed Ali Rashid