The SEC final rule adopting "risk mitigation" requirements applicable to security-based swap dealers ("SBSDs") was published in the Federal Register. The final rule is effective as of April 6, 2020.

As previously covered, the final rule maintains the provisions of the proposed rules, with some exceptions (detailed below).

  • Rule 15Fi-3 will require SBSDs to engage in portfolio reconciliations. The rule is analogous to CFTC Rule 23.502. However, several changes have been made to the proposed rule:

    • The SEC adopted a definition of "material terms" that generally aligns with the CFTC's definition, which, unlike the one in the proposal, does not distinguish security-based swaps ("SBSs") based on whether they are part of a "portfolio."

    • The SEC did not adopt all aspects of NFA Compliance Rule 2-49, but did adopt the requirement for SBSDs to notify the SEC if the amount of a previously notified valuation dispute increases or decreases by $20,000,000 at either the transaction or portfolio level.

    • The SEC expanded the exception for cleared SBSs to include those SBSs that are directly or indirectly submitted to and cleared by a clearing agency. The exception also applies to SBSs cleared by a clearing agency that the SEC has exempted from registration under Section 17A of the Exchange Act.

  • Rule 15Fi-4 will require SBSDs to engage in portfolio compression exercises. The rule is analogous to CFTC Rule 23.503. The SEC's final rule differs from the proposed rule. The SEC modified the exception from the portfolio compression requirements for cleared SBSs in the same way that it modified the exception from the portfolio reconciliation requirements for such swaps.

  • Rule 15Fi-5 will require an SBSD to have in place "swap trading relationship documentation" with its counterparties. The rule is analogous to CFTC Rule 23.504. The SEC also modified the final rule from the proposed rule, as it no longer requires that trading relationship documentation include terms governing "applicable regulatory reporting obligations."

In addition, the rules:

  • include cross-border interpretations in order for these rules to be treated as entity-level requirements (in contrast to the CFTC approach) and, thus, to be generally applicable to SBS entities without exception, but with the possibility of substituted compliance under Rule 3a71-6; and

  • amend recordkeeping, reporting and notification requirements relating to portfolio reconciliation.