Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) gives the U.S. Securities and Exchange Commission (SEC) jurisdiction over security-based swaps (SBS) and SBS market participants and requires the SEC to adopt rules to regulate this market. To date the SEC has proposed, but not yet finalized, certain of its key Title VII regulations. A critical component of the SEC’s Title VII regulatory framework is the registration and comprehensive regulation of SBS dealers (SBS Dealers).1 Implementation of these regulations has been stalled over the past several years pending the SEC’s finalization of certain SBS Dealer regulations, including capital, margin and segregation requirements that were originally proposed in October 2012.

Reboot on Capital, Margin and Segregation Requirements On October 11, 2018, nearly six years from its original proposal, the SEC voted 4-12 at an open meeting to reopen the comment period for its proposals relating to capital, margin and segregation requirements for SBS Dealers. The comment period is scheduled to be open for 30 days after the release is published in the Federal Register. The SEC release is available here.3 In addition to requesting comments on the prior proposals generally, the SEC has requested comments on specific aspects of them as well as on certain potential modifications to previously proposed rule language. Specifically, comments are sought regarding the following three SEC proposals:

  • capital, margin and segregation requirements for SBS Dealers, and amendments to the SEC’s net capital rules for broker dealers (Rule 15c3-1) (both proposed in October 2012) (together, the 2012 Proposal)4
  • amendments to the 2012 Proposal that address the cross-border treatment of SBS capital, margin and segregation requirements (proposed in May 2013)5
  • an amendment to the 2012 Proposal that would establish an additional capital requirement for SBS Dealers that do not have a prudential regulator (proposed in April 2014)6

At the open meeting, Chairman Jay Clayton described the reopening of the comment period as a “common-sense step” to provide the public with another opportunity to comment on several important proposals.7 Reopening of the comment period will enable market participants to comment on the proposals in light of market and regulatory developments, including the implementation of parallel margin regulations issued by the Commodity Futures Trading Commission (CFTC) and the U.S. prudential regulators as well as related efforts by foreign regulators. Among other things, the SEC is seeking comment on the continued appropriateness of the Registration Compliance Date (described below) and how baseline economic assumptions underpinning the proposed capital, margin and segregation requirements may have changed since the original proposals. The SEC is also seeking comment for the first time on certain proposed modified rule language, including changes relating to portfolio margining, the collection of initial margin from SBS Dealers and the calculation of capital and margin amounts for SBS transactions. Registration Compliance Date for SBS Dealers The SEC previously established a methodology for determining the date on which SBS Dealers will be required to register with the SEC.8 This Registration Compliance Date depends on the finalization of certain key Title VII rulemakings, including the SEC’s capital, margin and segregation requirements for SBS Dealers. Specifically, the Registration Compliance Date is currently the latest of

  1. six months after the date of publication in the Federal Register of a final rule release adopting rules establishing capital, margin and segregation requirements for SBS Dealers,
  2. the compliance date of final rules establishing recordkeeping and reporting requirements for SBS Dealers,
  3. the compliance date of final rules establishing SBS Dealer business conduct requirements under Sections 15F(h) and (k) of the SEA and
  4. the compliance date for final rules establishing a process for a registered SBS Dealer to make an application to the SEC to permit an associated person who is subject to a statutory disqualification to effect or be involved in effecting SBS on its behalf.

The SEC completed item (3) in April 2016 when it adopted final business conduct requirements for SBS Dealers.9 The remaining three items have not been completed; the SEC’s reopening of the comment period regarding its capital, margin and segregation proposals is a critical step to triggering the Registration Compliance Date. It is still unclear, however, how quickly the SEC will proceed and the sequence in which it may adopt the remaining rules.  The SEC’s SBS Dealer registration requirement applies to persons engaged in SBS dealing activities above a specified de minimis threshold.10 To determine whether this de minimis threshold is breached, a person must begin counting its SBS dealing activities two months prior to the Registration Compliance Date.11 A person who exceeds the de minimis threshold must submit a completed application to register as an SBS Dealer two months after the end of the month in which the de minimis threshold is exceeded.12

At the open meeting, Commissioner Hester Peirce indicated that she is interested in understanding from market participants whether the SEC’s current compliance period is consistent with an orderly registration process both for the SEC and for market participants. Understanding that preparations for SBS Dealer registration will be a significant undertaking, she suggested that the SEC may want to consider a phased-in approach to compliance following a firm’s registration as an SBS Dealer.13 Reporting and Dissemination of SBS Information As the SEC moves toward finalizing its Title VII regulatory framework, another aspect that has the potential to affect a broad set of SBS market participants is the SEC’s regulation regarding information reporting and dissemination for SBS (Reg. SBSR).14 The SEC adopted a final version of Reg. SBSR in July 2016 but did not impose any immediate reporting obligations at that time. The obligations are subject to a phased compliance schedule triggered, in part, by the Registration Compliance Date.15 Conditional Exemptive Relief In Connection With the Security Definition Dodd-Frank Title VII amended the definition of “security” under the SEA to expressly include SBS. The effect of this amendment was to expand the scope of the SEA regulatory provisions that apply to SBS. To maintain the status quo in the application of the SEA during the SEC’s implementation of its Title VII regulatory framework and, in particular, to address certain complex questions raised requiring further consideration, the SEC issued temporary exemptive relief from compliance with certain provisions in the SEA that would otherwise apply.

Generally speaking, the SEC exemptive relief grants temporary relief from compliance with certain SEA provisions in connection with SBS activity by any “eligible contract participant”16 and any broker or dealer registered under SEA Section 15(b). The relief has been extended several times since it was first provided and currently extends until February 5, 2019.17 Participants in the SBS markets should remain aware of the status of this relief and of the continued potential to rely on it as the SEC moves toward finalizing its Title VII regulatory framework.