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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Statement at SEC Open Meeting


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
December 15, 2010

Security-Based Swaps

Good Morning. This is an open meeting of the U.S. Securities & Exchange Commission on Dec. 15, 2010.

Today, the Commission will consider five items stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

First, we will consider two proposals that would further develop the regulatory regime around security-based swaps, as required by Title VII of the Act. These rules involve the mandatory clearing — and exceptions to mandatory clearing — of security-based swaps.

Second, we will consider three proposals which would implement Dodd-Frank’s requirements that issuers provide investors with certain specialized disclosure about conflict minerals, mine safety and payments to the U.S. or foreign governments by resource extraction companies.

Security-Based Swaps Rules

We begin with two sets of rules that would help to further develop the new regulatory program around security-based swaps.

Mandatory clearing of security based swaps is a central part of the reforms under the Dodd- Frank Act, and a very important part of this new regulatory regime involves the establishment of standards for the clearing of swaps and security-based swaps.

Essentially, a clearing agency acts as a middleman between the parties to a transaction, assuming the risk in the event of a default.

When structured and operated appropriately, clearing agencies provide important benefits like improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades. Through these actions, the “clearing” process can help to reduce risks to the financial system overall.

In addition, regulators are more easily able to monitor transactions, including prices and positions taken by traders.

The Dodd-Frank Act exempts certain types of transactions from the mandatory clearing requirement. For instance, clearing is not required when the transaction is associated with hedging or mitigating commercial risks of non-financial enterprises -- generally referred to as “end-users.”

By providing end-users with more options with respect to transacting in security-based swaps, the end-user exception empowers commercial businesses to use either cleared or non-cleared security-based swaps that best suit their risk management needs.

Mandatory Clearing and Supervision of Systemically Important Financial Market Utilities

The first swaps-related item on our agenda includes rules that would set out the process by which a clearing agency will submit information to the SEC about a security-based swap that the clearing agency plans to accept for clearing. That information is designed to aid the SEC in determining whether the swap is required to be cleared.

A related rule would establish the procedure by which the Commission may stay the clearing requirement at the request of a counterparty or on the Commission’s own initiative.

Further, we will consider rules that would require a designated financial market utility — like a clearing agency — to provide advance notice to the SEC before it makes certain changes to its rules, procedures or operations if the SEC is its supervisory agency under the law. Such notice would be required where the change could materially affect the nature or level of risk presented by the financial market utility.

End-User Clearing Exception

The second swaps-related item on our agenda is a proposed rule that would specify the steps that end-users must follow to notify the SEC of how they generally meet their financial obligations when engaging in a security-based swap transaction that is exempt from the mandatory clearing requirement.

To prevent abuse of the end-user clearing exception, the proposed rule also would require a non-financial entity to notify the Commission each time it elects to use the end-user clearing exception by delivering certain information to a security-based swap data repository.

Further, as directed by the Dodd-Frank Act, the Commission is seeking comment on whether small banks, savings associations, farm credit system institutions and credit unions with total assets under $10 billion, should receive an exemption to also allow them to use the clearing exception that is available to end-users, when the bank is hedging or mitigating their business risk.

In preparing the rules proposed today, our rulemaking teams have been working very closely with the CFTC. The teams have also been coordinating efforts with other financial regulators as required under the Act, and have consulted extensively with our regulatory colleagues, market participants and the public in the rulemaking process. All of these factors are reflected in the proposals before us today, and I would like to thank the staff for their efforts in preparing the materials we will discuss.

Before I ask Robert Cook, Director of the Division of Trading and Markets, to discuss the proposed rules, I would like to thank Robert, as well as John Ramsay, Brian Bussey, Haimera Workie, Nathaniel Stankard, Peter Curley, Kim Allen, Catherine Moore, Andrew Blake, Andrew Bernstein, Kenneth Riitho, Ann McKeehan, and Richard Grant from the Division of Trading and Markets for their hard work on this rulemaking.

Thanks as well to Meridith Mitchell, David Blass, Deborah Flynn and Cynthia Ginsberg from the Office of the General Counsel; Adam Glass, Scott Bauguess, Eric Carr, Burt Porter and Adam Yonce from the Division of Risk, Strategy and Financial Innovation; Lisa Watson from the Office of the Chief Accountant; and Amy Starr and Thomas Kim from the Division of Corporation Finance.

Finally I would like to thank the other Commissioners and all of their counsels for their work and comments on the proposed rule.

Now I will turn the meeting over to Robert Cook to hear more about the Division’s recommendations.



Modified: 12/15/2010