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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Statement at Open Meeting: Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

Washington, D.C.
June 29, 2011

Thank you, Chairman Schapiro. I also want to thank the staff and particularly Robert Cook and the Division of Trading and Markets, for their excellent work on this release. This rulemaking presents a particularly difficult task for the Commission: we have been charged with, among the many mandates of Dodd-Frank, to draft business conduct standards governing the relationships between security-based swap dealers and major security-based swap participants and their counterparties, and we are doing so in effect contemporaneously with the establishment of the SEC’s registration and reporting regulatory regime for security-based swaps.

That is, we are writing rules about the way that participants need to deal with one another before we have gained the experience we presumably would like to have to understand how these markets operate, how the market participants interact, and what risks are posed to market participants in these interactions.

The risk to such an approach is plain: if we are not extraordinarily careful and judicious in this rulemaking, we can end up imposing business conduct standards that provide no meaningful protections to market participants but which actually prevent absolutely critical hedging and other risk mitigation activity from taking place. This includes the risk of potentially closing out of the market certain participants such as special entities which are accorded enhanced protections under the statute.

For this reason, I would like to credit Robert Cook and his staff for the care and detail they have devoted to this proposal. They have met countless times with market participants to gain a fuller understanding of the security-based swaps markets, and they have recommended to us a proposal that, while informed in part by the experiences we have gained in regulating the securities markets, also acknowledges the differences between the swaps markets and the markets we traditionally have regulated.

Importantly, while our experiences in regulating the conduct of brokers in their dealings with customers can and does inform our thinking in this release, we are also mindful of the limitations of importing a regime crafted largely to protect retail investors into a world made up almost exclusively of large and sophisticated actors.

On that point, I am particularly interested in whether we have crafted the rules correctly to allow swap dealers and major swap participants to rely on written representations. We have provided two alternatives on when SBS entities cannot rely on written representations, and I am particularly interested in hearing from commentators on which approach will provide greater certainty to market participants.

I am also interested in comments on the questions we have asked about whether it may make sense to allow counterparties to affirmatively opt out of the protections afforded under the proposed rule. That is, might private ordering allow at least some experienced market participants to better calibrate the level of protection they need and reduce potential inefficiencies in the market?

I am also interested in the provisions regarding the additional responsibilities imposed on chief compliance officers of SBS entities. Much, although not all, of what we are requiring in this rule is required by the statute, but I am particularly interested in how the panoply of obligations imposed by both statute and rule are altering the role and function of the CCO within the firm, and imposing duties on CCO’s that are traditionally functions for which senior management is responsible. In this and other releases, we are altering the role of the CCO, and prescribing in further detail how companies should structure themselves to promote compliance. I would like to hear from commenters on whether these structural prescriptions on firm organization are necessary, or whether they actually may be unhelpful or even counterproductive in promoting cultures of compliance within these firms and achieving broader objectives of sound risk management.

The release also extends pay to play restrictions into the SBS market. I would be interested in commenters’ views as to whether the rules as applied to qualified independent representatives and SBS Dealers pose any particular issues in this space.

Lastly, I want to comment, as I have in prior releases, on the decision not to include a full cost-benefit analysis in the release. The prevailing position is that we need not conduct a cost-benefit analysis on those items mandated by Dodd-Frank itself, but instead that we may confine our cost-benefit analysis only to those provisions that we are proposing at our discretion. I should note that this approach is even more limited than it seems, because we do not even conduct cost-benefit analysis of the discretionary choices we make within mandatory rulemaking items.

I believe the general decision to avoid serious analysis of the total costs of the rulemaking is shortsighted and actually impairs the Commission’s ability to assess the merits of the rules we may propose and ultimately adopt. It is imperative that we get a more complete understanding of the total costs, and total benefits, of the entire regulatory regime we are creating. Only if we understand the total burden, whether that burden is statutorily imposed or not, can we make sound decisions on the marginal costs and benefits of rules as we consider them.

For this reason, regardless of the position we have taken in putting together our cost-benefit analysis for this and other rules we have proposed, I would strongly encourage commenters to provide data and analysis about the total costs of the regulatory regime we are designing, so that we may be better informed as we consider and adopt rules going forward.

In conclusion, I want to strongly encourage comment on all aspects of this proposal. As I stated at the outset, it is critically important that we get these rules right, and robust comment from those with experience in these markets is critical to achieving that goal. I again want to thank the staff for their considerable efforts on this proposal, and I have no questions.



Modified: 07/26/2011