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From Securities Regulation Daily, January 14, 2015

SEC adopts framework for security-based swap data repositories

By Jacquelyn Lumb

The SEC, in a three-to-two vote, has adopted new rules that establish a framework for the registration of security-based swap data repositories (SDRs) and for the reporting and dissemination of security-based swap transactions. Also, in a three-to-two vote, the commissioners approved a proposal for new rules, amendments, and guidance related to the reporting and public dissemination of security-based swap transaction data. Commissioners Daniel Gallagher and Michael Piwowar, both of whom opposed all three recommendations, objected in particular to the governance provisions relating to SDRs’ chief compliance officers and the use of legal entity identifiers for all counterparties in swap transactions.

The commissioners agreed that the lack of transparency in the over-the-counter derivatives market was at the heart of the 2008 financial crisis. The Dodd-Frank Act created a new regulatory framework to bring transparency to this market and gave the SEC jurisdiction over security-based swaps.

Swap data repositories. Under the new framework, swap data repositories will register with the SEC on new Form SDR. SDRs are charged with recording all reported security-based swaps and protecting the privacy of the transaction information they receive. Transaction data must be maintained for a minimum of five years. The SEC will have direct electronic access to the swap data and reports maintained by the SDRs.

SDRs will be required to maintain certain books and records and will be subject to inspections and examinations. They must designate a chief compliance officer who will file annual compliance and audited financial reports with the SEC. Under certain conditions, non-U.S. SDRs that operate in the U.S. will be exempt from registration.

The SDR rules will become effective 60 days after publication in the Federal Register, but SDRs will not be required to comply with the rules until one year after publication.

Regulation SBSR. Regulation SBSR establishes the framework for the reporting and public dissemination of swap information. Under this framework, the SEC recognizes the Global Legal Entity Identifier System as an international standards setting system that will provide legal entity identifiers for counterparties in reports submitted under Regulation SBSR. The framework requires the adoption of policies and procedures with respect to SDRs’ reporting and dissemination obligations. The SEC may permit market participants to satisfy Regulation SBSR through substituted compliance. SDRs also must register with the SEC as securities information processors.

Regulation SBSR also will become effective 60 days after publication in the Federal Register. Compliance with some of the new rules takes effect on the same date, while others will be subject to a compliance schedule outlined in the new proposing release.

Proposed rules. The proposing release outlines the reporting duties for clearing transactions and security-based swap transactions that are executed on a platform that will be submitted to clearing. The proposal would prohibit SDRs from charging fees or imposing usage restrictions on the users of the transaction data that must be publicly disseminated. The proposal explains the application of Regulation SBSR to prime brokerage security-based swap transactions and provides guidance for the reporting and public dissemination of allocations of cleared security-based swaps.

SEC Chair Mary Jo White said the new rules form the core of derivatives reform. The new framework for swaps transactions addresses the blind spots that were exposed during the financial crisis, she said, and will bring transparency and efficiency to the market.

Commissioners’ remarks. White said the rules establish common sense governance requirements for SDRs, which were supported by commenters and are consistent with the CFTC’s requirements for the swaps markets it regulates. Gallagher, on the other hand, saw the governance requirement as an unnecessary intrusion into areas traditionally overseen by the states.

White also referred to the sensible protections of the integrity and independence of the SDR’s compliance function, including the requirement that the boards approve the appointment, compensation, and removal of the chief compliance officer, and the prohibition on seeking to improperly influence the CCO. Gallagher called the governance provisions, such as the business experience of the officers, directors, and the CCO, “regulation by form,” and said they were not germane to the rules.

Gallagher. With respect to the Regulation SBSR rules, Gallagher said the release is replete with references to yet-to-be-adopted rules in anticipation of future rulemaking. The SBSR rules are not ready for prime time, he said. It would have been better to complete the work on the open issues before adopting these rules.

Aguilar. Commissioner Luis Aguilar addressed a number of areas where additional action is needed, including real-time reporting for swaps trades, with a potential delay for reporting block trades at the SEC’s discretion. The staff did not have sufficient data to define a block trade and plans to study the trading data to determine an appropriate reporting time delay. Until then, all trades may be reported up to 24 hours after execution. Aguilar hopes the staff will develop a recommendation that will achieve real-time reporting for all trades.

Stein. Commissioner Kara Stein agreed that the rules the SEC adopted today were a start, but not the end of the SEC’s work on swaps. She hopes the staff can produce a proposal within the next three months on taxonomies for reporting swaps data, what constitutes a block trade, and real-time reporting.

Piwowar. Piwowar said he largely supported the rulemaking initiative in its original form, but he blamed fellow commissioners for skewing the rules to achieve a specific ideological outcome. He said the “lying to the CCO” provision would chill communications. He added that the staff had earlier rejected that provision, yet it appears in the final rule.

Piwowar also noted that the earlier draft would not have mandated the use of legal entity identifiers for market participants that had not previously purchased them. The rules now require all U.S. persons engaged in securities-based swap transactions to obtain an LEI, regardless of their size or the limited nature of their activities. This is an overbroad approach and reflects a failure to calibrate the rules for different types of market participants, he said.

MainStory: TopStory Swaps Derivatives DoddFrankAct ExchangesMarketRegulation FormsFilings SECNewsSpeeches

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