Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rules Regarding Reporting and Dissemination of Security-Based Swap Information (Regulation SBSR)
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
November 19, 2010
Thank you, Chairman Schapiro.
Sections 763 and 766 of the Dodd-Frank Act amend the Exchange Act to authorize the Commission to adopt rules regarding the reporting and dissemination of security-based swap transaction data. Pursuant to this authority, the Commission is proposing Regulation SBSR.
I support the recommendation before us to propose Regulation SBSR.
I want to compliment the staff for your thoughtfulness in crafting the proposal, especially the measured approach the proposal takes at this time to block trades — an approach to the rule that will allow us to make a more informed decision with the benefit of commenters' input and, hopefully, more data. Indeed, as a general matter, a more incremental approach when fashioning the regulatory regime for security-based swaps may prove to be especially prudent. Incrementalism permits a more efficient and better-calibrated regulatory regime to develop over time, having been grounded in the learning of experience and our consideration of the market's adaptations.
The proposing release solicits comment on a range of topics and asks a number of specific questions. As always, I look forward to considering the comments we will receive. I am particularly interested in comments that address the following:
How will market participants use information concerning security-based swap transactions that other parties entered into? Assume, for example, a security-based swap that is highly illiquid, trading very infrequently. What does a price that reflects the views of, say, only two parties signal as compared to a price that incorporates a wide diversity of perspectives, as would be the case in a liquid market where there are many transactions?
What factors should be considered in determining what constitutes a "block trade"? If the size of the trade is to be a factor, how should size be determined? Should "block trade" be defined with respect to the frequency of trading in a particular security-based swap instrument? Are considerations other than size and liquidity relevant in determining whether the disclosure of a trade could impact the market?
What information should be disclosed and when for block trades? How long might it take for a party to hedge its position after entering into a security-based swap transaction if it chooses to do so? What are the implications if the size of a block trade is disclosed on a delayed basis? Will market participants be able to discern that the corresponding trade is a block trade precisely because the exact size is not disclosed if the size of trades below a cutoff must be disclosed? To what extent might the price itself signal the likelihood of subsequent transactions to the disadvantage of a party looking to hedge its exposure after entering into a security-based swap trade?
What are the potential consequences — such as for risk management and capital formation — if the cost of entering into certain security-based swap transactions were to increase? What are the potential consequences if there was less liquidity in the market?
Let me conclude with two thoughts.
First, a market participant should be cautious and not find itself relying on last-sale information — that is, the price at which other parties were prepared to transact — as a substitute for undertaking its own independent valuation of a security-based swap or other asset. Last-sale information simply should be an input into one's decision making; one's valuation should not depend too much on the terms upon which others decided to trade.
The price at which others were willing to transact — particularly where a highly illiquid instrument is concerned — does not necessarily reflect the instrument's value. One can only extrapolate so much about "value" when the views of relatively few parties are incorporated into the observed price. Accordingly, it is important for a market participant to guard against allowing last-sale information to bias its judgment. To the extent last-sale information works as a benchmark that unduly anchors another market participant's valuation, that participant's independent assessment of value is compromised. This could be an unwelcome result.
Second, even as we take steps to promote transparency in the security-based swap market, it is important to recognize, as the proposing release does, that Dodd-Frank directs the Commission to "take into account whether the public disclosure will materially reduce market liquidity." In other words, transparency is not the only objective at stake. In fact, more transparency that comes at the expense of liquidity could undercut broader policy goals.
I'd like to join my colleagues in thanking the staff — especially those from the Division of Trading and Markets and the Division of Risk, Strategy, and Financial Innovation — for all your efforts advancing this proposal.