Securities and Exchange Commission Chair Mary Schapiro

On May 21, 2012, Securities and Exchange Commission Chair Mary Schapiro testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs concerning SEC’s ongoing implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Her remarks are published online at “Testimony on Implementing Derivatives Reform: Reducing Systemic Risk and Improving Market Oversight.”

SIDE BAR: Title VII of the Dodd-Frank Act mandates the oversight of the OTC derivatives marketplace and requires that the SEC and the Commodities Futures Trading Commission (which share regulatory authority over swaps – with “security-based swaps designated to the SEC and the overwhelming majority of the balance to the CFTC) write rules that address, among other things:

• mandatory clearing,
• the operation of security-based swap and swap execution facilities and data repositories,
• capital and margin requirements
• business conduct standards for security-based swap and swap dealers and major participants, and
• regulatory access to and public transparency for information regarding security-based swap and swap transactions.

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Schapiro characterizes the OTC derivatives market as having become a truly global market in which the “application of Title VII to cross-border transactions raises a substantial number of complex issues. Among other things, it requires consideration and appreciation of foreign regulatory frameworks and of competition concerns. This is not an easy task. . .”  Accordingly, Schapiro stated that “rather than deal with the international implications of Title VII piecemeal, we intend to address the relevant issues holistically in a single proposal. The publication of such a proposal is intended in part to give investors, market participants, foreign regulators, and other interested parties an opportunity to consider as an integrated whole our proposed approach to the registration and regulation of foreign entities engaged in cross-border transactions involving U.S. parties. . .”

The Dirty Dozen

The SEC continues to move forward with rulemaking proposals in each of the twelve areas required by Title VII where rules have been proposed (numbering not provided in online release):

1. Joint rules with the CFTC regarding further definitions of the terms “swap,” “security-based swap,” and “security-based swap agreement;” the regulation of mixed swaps; and security-based swap agreement recordkeeping;
2. Rules prohibiting fraud and manipulation in connection with security-based swaps;
3. Rules regarding trade reporting, data elements, and real-time public dissemination of trade information for security-based swaps that would lay out who must report security-based swaps, what information must be reported, and where and when it must be reported;
4. Rules regarding the obligations of security-based swap data repositories that would require them to register with the Commission and specify the extensive confidentiality and other requirements with which they must comply;
5. Rules relating to mandatory clearing of security-based swaps that would establish a process for clearing agencies to provide information to the Commission about security-based swaps that the clearing agencies plan to accept for clearing;
6. Rules regarding the exception to the mandatory clearing requirement for hedging by end users that would specify the steps that end users must follow, as required under the Dodd Frank Act, to notify the Commission of how they generally meet their financial obligations when engaging in security-based swap transactions exempt from the mandatory clearing requirement;
7. Rules regarding the confirmation of security-based swap transactions that would govern the way in which certain of these transactions are acknowledged and verified by the parties who enter into them;
8. Rules defining and regulating security-based swap execution facilities, which specify their registration requirements, and establish the duties and implement the core principles for security-based swap execution facilities specified in the Dodd-Frank Act;
9. Rules regarding certain standards that clearing agencies would be required to maintain with respect to, among other things, their risk management and operations;
10. Rules regarding business conduct that would establish certain minimum standards of conduct for security-based swap dealers and major security-based swap participants, including in connection with their dealings with “special entities,” which include municipalities, pension plans, endowments and similar entities;
11. Rules regarding the registration process for security-based swap dealers and major security-based swap participants; and
12. Rules intended to address conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and exchanges that trade security-based swaps.