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SEC Adopts Interim Rule to Require Reporting of Security-Based Swaps


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Washington, D.C., Oct. 13, 2010 — The Securities and Exchange Commission today 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 Wall Street Reform and Consumer Protection Act. This rule applies only to such swaps whose terms had not expired as of July 21.

Prior to passage of the Dodd-Frank Act, the over-the-counter derivatives market was largely unregulated. The new law fills a number of significant regulatory gaps and gives the SEC important new tools to better protect investors.

The interim rule requires parties to report security-based swap information to the SEC or to a registered security-based swap data repository. Parties also are required to preserve data pertaining to the terms of pre-enactment security-based swaps in support of the reporting requirements.

"This interim final rule provides a means for the Commission to gain a better understanding of the security-based swap markets, including their size and scope," said SEC Chairman Mary L. Schapiro. "Until such time as final rules are adopted, this interim rule clarifies who needs to do security-based swaps reporting, what needs to be reported, and when such reporting needs to occur."

The interim rule becomes effective once it is published in the Federal Register, and the agency will continue seeking public comments to inform its development of a permanent reporting procedure.

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Under the Dodd-Frank Act, the SEC and the Commodity Futures Trading Commission are charged with regulating certain over-the-counter derivatives, which previously had been excluded from regulatory oversight.

A derivative is a financial instrument or contract whose value is 'derived' from an underlying asset, such as a commodity, bond or equity security. The instruments provide a mechanism for the transfer of market risk or credit risk between two counterparties. Derivatives are incredibly flexible products that can, essentially, be engineered to achieve almost any financial purpose between two parties. For instance, a derivative can be used by two parties who have a differing view on whether a particular stock price will go up or down or whether an event will happen in the future. With derivatives, market participants can track or replicate the economics of holding or shorting an underlying asset, such as a security, thereby enabling participants to gain a desired market or credit exposure without actually holding the underlying asset.

The OTC derivatives market has grown exponentially in recent years.

Under the new law, regulatory authority for OTC derivatives is divided between the SEC and the CFTC. The SEC will regulate OTC derivatives that are "security-based swaps" and the CFTC will regulate "swaps." To prevent gaps, regulatory arbitrage and confusion, the SEC and CFTC will engage in joint rulemaking to further define key terms like "security-based swap" and "swap."

Dodd-Frank Requirements

Section 766 of the Dodd-Frank Act requires that the Commission adopt an interim final rule, within 90 days of enactment, requiring the reporting of security-based swap transactions that occurred before the enactment of the legislation. This requirement only applies to transactions that had not expired as of the date of enactment.

The CFTC recently adopted its reporting rule for swap transactions subject to the CFTC's regulatory authority.

The New Rule

Under the interim rule approved today — Rule 13Aa-2T — specified counterparties to pre-enactment security-based swap transactions are required to:

  • Report certain information relating to pre-enactment security-based swaps to a registered security-based swap data repository after such registered security-based swap data repository is operational, or to the Commission.

  • Report information relating to pre-enactment security-based swaps to the Commission upon request.

In addition, the proposed rule requires counterparties that may be required to report to retain information relating to the terms of these pre-enactment security-based swaps.

What's Next?

The new reporting rule becomes effective once it is published in the Federal Register. However, the SEC will continue to seek public comment on the rule and consider those comments as it develops a permanent reporting procedure, as required by the law.



Modified: 10/13/2010