Statement at Open Meeting on Consideration of Whether to Adopt Rule of Practice 194 and to Propose Rules Regarding Risk Mitigation Techniques for Uncleared Security-Based Swaps
Dec. 19, 2018
The two recommendations that we are considering today reflect important steps in implementing the security-based swap dealer regulatory framework mandated by Congress in Title VII of the Dodd-Frank Act. Over the past year, under the direction of Chairman Clayton, this Commission has taken significant steps toward standing up this long-overdue regulatory framework. Under his leadership, the staff has redoubled its efforts to coordinate and consult with the CFTC staff on a broad range of Title VII issues and has looked for areas where harmonization with the CFTC may be feasible. The Commission has executed an updated memorandum of understanding with the CFTC expressly addressing cooperation and the exchange of information involving swaps and security-based swaps. In October, we reopened for comment our capital, margin, and segregation rules to provide the public with an additional opportunity to offer their views on one of the most central—and complex—elements of the Title VII regulatory framework. I know that the staff is putting in long hours even during this holiday season to review comments received, meet with commenters, and grapple with the remaining issues that need to be addressed as we move to finalize the remaining rules.
Turning to the recommendations before us, I believe that both the recommendation to adopt Rule 194 and the recommendation to propose risk mitigation requirements for security-based swap dealers reflect this Commission’s continuing commitment to standing up the Title VII regime in a responsible, timely manner. As the Chairman and the staff have just noted, both recommendations advance the objective of harmonization with the CFTC’s already-existing requirements and reflect the staff’s careful consideration of the operational issues that any differences between our two agencies’ rules would raise for market participants. Taking these steps to minimize our differences from the CFTC’s approach should reduce the risk of market fragmentation as we stand up our regime; reduce the burdens of coming into compliance with our rules; and mitigate the operational risks for market participants, many of whom operate in both the security-based swap and swap markets.
In particular, I appreciate the staff’s careful balancing in Rule 194 of our interests in keeping bad actors out of our markets and in avoiding potential disruption to the security-based swap market as we stand up the regime. In adopting this rule, the Commission is exercising its statutory authority under the Exchange Act to determine whether a statutorily disqualified associated person may be involved in effecting security-based swaps on behalf of a security-based swap dealer, providing that the Commission will recognize certain determinations made by other regulators to provide relief to associated persons who would otherwise be subject to a statutory disqualification. To be clear, this provision does not provide relief where the Commission has already barred an individual, nor does it limit the Commission’s ability to issue its own bars to any individual under its own rules. Rather, it reflects a narrowly tailored approach that advances the interests of regulatory comity and efficiency and avoids unnecessary duplication of similar procedures where another regulator has already evaluated an associated person’s request for relief and determined to grant it. Similarly, the exclusion for associated person entities harmonizes our approach with that already taken by the CFTC and should eliminate the risk of disruptions that could arise from applying the statutory disqualification provision to such entities in this highly concentrated market.
With respect to the recommendation to propose risk mitigation requirements, I would like to highlight two issues on which I particularly hope commenters will provide us their frank views. First, the staff made a remarkable effort to harmonize these proposed requirements with the corresponding CFTC requirements, including taking into account how the National Futures Association implements some aspects of the CFTC rules. However, as the release notes, the proposed portfolio reconciliation rules would depart from the CFTC’s requirements with respect to the terms required to be addressed in the initial portfolio reconciliation of a transaction between a dealer and its counterparty. The proposal solicits comment as to whether this approach could potentially provide a factual basis that could permit swap data repositories to satisfy their regulatory obligation under previously adopted rules to confirm with both counterparties to a trade the accuracy of data reported in connection with that transaction. I look forward to hearing whether this approach actually represents a possible step toward addressing this issue. Even if it does, please let us know whether the benefit of addressing the SDR issue outweighs any additional complexity caused by departing from the CFTC’s requirements in this particular context. The proposal identifies a couple of other minor differences from the CFTC’s rules, and I look forward to your views on those differences as well.
Second, I recognize that the risk mitigation requirements, if adopted (and even if fully identical to the CFTC’s requirements), may impose additional documentation and other burdens on firms required to register as security-based swap dealers beyond those that these firms may already have incurred under the CFTC rules. I encourage commenters to describe these burdens in their responses to the proposal and, to the extent that those burdens are significant, to suggest how the Commission might implement compliance in a way that appropriately accounts for the various demands on firms’ resources as they deal both with preparing to register with the Commission and with responding to other regulatory mandates they will face over the coming years.
In closing, I would like to express my thanks to the Chairman and my fellow Commissioners for taking this significant step forward on Title VII, and to the staff for their tireless work in preparing these recommendations for our consideration, including all the time they put into working with our colleagues at the CFTC to understand their rules and reflect that understanding in these recommendations.