Opening Statement at SEC Open Meeting: Defining Swaps-Related Terms
Chairman Mary Schapiro
April 18, 2012
Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on April 18, 2012.
Today the Commission will consider adopting the first of a series of rules related to the oversight of swaps and security-based swaps under Title VII of the Dodd-Frank Act.
This is one of several rules required by Title VII, which established a comprehensive framework for regulating the over-the-counter swaps markets. The Act calls on the SEC to regulate those products deemed to be security-based swaps and the CFTC to regulate swaps.
Among other requirements, Title VII mandates that dealers and major participants in this market register and be subject to regulatory oversight. The law also subjects dealers and major participants to capital, margin, business conduct and additional requirements.
Title VII defined the terms “swap dealer,” “security-based swap dealer,” “major swap participant” and “major security-based swap participant,” but the statute directed the SEC and CFTC jointly to further define those terms in consultation with the Federal Reserve Board. It also required the agencies to define the term “eligible contract participant.” The final rules and interpretations we are considering today are intended to satisfy these directives.
After the SEC and CFTC issued our joint proposal in 2010, we received hundreds of comments. Additionally, SEC and CFTC commissioners and staff met with many market participants, investors and others, and held a public roundtable to inform our approach to developing these definitions. The feedback we have received has been helpful in highlighting the many issues the definitions raise and in emphasizing the importance of getting the definitions right.
The final rules we are considering today also have benefited significantly from work done by the staff of the Commission’s Division of Risk, Strategy and Financial Innovation – which analyzed extensive information regarding the market for single-name credit default swaps (CDS). Our economists played the central role in this effort, closely collaborating with the staff of the Division of Trading and Markets as well the Office of General Counsel. Together, they identified concerns and issues that impact either directly or indirectly the potential costs and benefits of the rulemaking and analyzed the likely economic consequences of various approaches.
I’m pleased that the Commission and its staff took the time necessary to analyze available data and to make the analysis available to the public. In particular, I note that the data analysis informed the de minimis thresholds, which have been tailored to the specifics of the products and the markets at issue, with a goal of preserving key counterparty and market protections while promoting regulatory efficiency.
Our analysis of available data on CDS highlights the significant concentration in the single-name CDS market, the portion of the CDS market for which the SEC is responsible. We believe that both the $3 billion de minimis threshold and the $8 billion phase-in level for CDS ensure that the vast majority of notional dealing activity in this market is subjected to the SEC’s Title VII dealer regulatory regime, consistent with the statutory de minimis exception.
For security-based swaps other than credit default swaps, we were guided in part by data that showed that the size of this market is only a small fraction of the size of the CDS market. Consistent with this difference, we have set the de minimis threshold for these security-based swaps at $150 million and the phase-in level at $400 million.
In establishing who is a security-based swap dealer, Congress gave us the task of identifying those entities that specifically engage in dealing activity in this market. In doing so, Congress did not intend for all, or even most, market participants who merely engage in security-based swap transactions – such as mutual funds and pension funds – to be regulated as security-based swap dealers.
Further, in addition to limiting the pool to just dealers, Congress also sought to have us regulate only those market participants who engage in dealing activity above a de minimis amount. By following Congress’ mandate to capture those engaged in dealing activity (even above a certain threshold), we are able to extend the protections of the Title VII dealer regulatory regime not only to regulated dealers, but also to their counterparties. This gives us even further coverage over security-based swap transactions in the market.
Additionally, although this is the first in a series of final rules arising under Title VII, I would like to point out that we are still committed to issuing a plan that lays out the way in which all the Title VII rules will be implemented.
Further, we currently are working to propose rules involving capital, margin, segregation, recordkeeping, and reporting for security-based swap dealers and major security-based swap participants, as well as a proposed approach to the international application of Title VII.
In addition to the need for final rules regarding the dealer and participant registration process, we are very aware of the importance of providing market participants with an implementation roadmap and “rules of the road” for cross-border issues before requiring dealer and major participant registration. Accordingly, today’s adoption will not trigger any immediate obligation to register as a security-based swap dealer or major security-based swap participant.
Adopting the entity definitions is a foundational step in the establishment of the new regime to regulate trading in this significant market. These rules clarify for market participants whether their current activities will subject them to comprehensive oversight in the coming months.
Before I ask Robert Cook, Director of the Division of Trading and Markets, to discuss the Division’s recommendations, I would like to express my gratitude to the CFTC staff, Commissioners, and Chairman Gensler for all the effort they have put into these rules. The CFTC continues to be a collaborative partner in this process.
I also would like to thank the SEC staff for their efforts in bringing these recommendations before the Commission. They have worked many, many long hours analyzing comments, discussing issues with the CFTC and the public, weighing alternative approaches and developing the final recommendations, and keeping the Commission closely apprised of the development of these recommendations. You have once again done an extraordinary job.
In particular, I would like to thank Robert as well as Brian Bussey, Joshua Kans, Richard Grant, Richard Gabbert, Gregg Berman, and Nathaniel Stankard from the Division of Trading and Markets for all of their work on this rulemaking.
Thanks as well to Craig Lewis, Jennifer Marietta-Westberg, Adam Yonce, Gopa Biswas, and Matt Kozora from the Division of Risk, Strategy, and Financial Innovation; Mark Cahn, Meridith Mitchell, Kevin Zambrowicz, Paula Jenson, Janice Mitnick, and Robert Bagnall from the Office of the General Counsel as well as Hope Jarkowski, formerly of the General Counsel’s Office and now counsel to Commissioner Paredes; Amy Starr and Andrew Schoeffler from the Division of Corporation Finance; Jouky Chang, Jeffrey Cohan and Rachel Mincin from the Office of the Chief Accountant; and Stephen Packs and Edward Rubenstein from the Division of Investment Management.
Finally, I would like to thank the Commissioners and all of our counsels, especially Cristie March in my office, for their work and comments on this rulemaking. I’d also like to give a special thanks to Commissioner Dan Gallagher. As many of you know, Dan was a valued member of the staff of the Division of Trading and Markets before coming back to the SEC as a Commissioner. As such, the perspective and approach to working through issues that Dan has brought as a former staff member and to this rulemaking in particular are most welcome.
Now I’ll turn the meeting over to Robert Cook to hear more about the Division’s recommendations.