Friday, April 08. 2022
SEC Proposes Rules to Reform Registration and Regulation of Security-Based Swap Execution Facilities
The proposed regime is one of a number of major reforms required under Title VII of the Dodd-Frank Act, which improved transparency and oversight of the over-the-counter derivatives market by requiring the SEC to employ a regulatory framework for security-based swaps (SBS) that requires the registration and regulation of SBSEFs.
Proposed Regulation SE would:
- implement the “trade execution requirement” for SBS and address various issues relating to the requirement, including its cross-border application
- address conflicts of interest at SBSEFs and national securities exchanges that trade SBS
- establish a regime for the registration and regulation of security-based swap execution facilities (SBSEFs)
The proposed rules are designed to promote consistency between the proposed rules governing SBSEFs and the current rules under the Exchange Act, including conditions that would:
- consider a registered SBSEF to be registered with the SEC as a broker but exempt from some broker requirements
- phase out a current exemption from clearing agency registration for a non-registered entity acting as an SBSEF
- allow the SEC to analyze final actions taken by an SBSEF
- remove from the definition of “exchange” both registered SBSEFs and SBS clearing agencies that perform certain matching and execution functions
To support consistency across proposed Regulation SE , the SEC is proposing Rule 802(w) which would establish definitions of terms used in multiple rules throughout Regulation SE. Rule 802(w) would enact the Exchange Act definition of “security-based swap execution facility” but would not include an SEC-registered entity as a clearing agency. The rule also would limit its security-based swap matching functions to operation of a trading session that is intended to enhance the accuracy of end-of-day valuations.
The following is guidance for an entity meeting the definition of “security-based swap execution facility”:
- Register with the SEC as an SBSEF on new Form SBSEF or register as a national securities exchange
- Foreign SBS trading venues may seek an exemption from the definition of “security-based swap execution facility” pursuant to proposed Rule 833(a)
Registered SBSEFs would be required to:
- maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the SEC, for a period of five years
- submit filings with the SEC for new rules, rule amendments, or products
- possess adequate financial, operational, and managerial resources to discharge its responsibilities
- submit information requested by the SEC, including demonstrations that the SBSEF is in compliance with one or more Core Principles, notification of a transfer 50 percent or more of the equity interest in the SBSEF, and information about pending legal proceedings
- create and maintain a program of automated systems and risk analysis to identify and minimize sources of operational risk, through the development of appropriate controls and procedures
- implement, comply with, and enforce its rules, including, among others, rules regarding market access, trading and trade processing, the operation of the SBSEF, the financial integrity of SBS on its facility, the exercise of emergency authority, and conflicts of interest
- develop and maintain emergency procedures, backup facilities, and a disaster recovery plan
- oversee trading and market activity to prevent manipulation, price distortion, and delivery or settlement disruptions
- appoint a chief compliance officer (CCO) and establish regulatory and reporting obligations for the CCO
- share public and timely information on price, trading volume, and other trading data on SBS transactions, as required by Regulation SBSR, and publish on its website a Daily Market Data Report;
In addition, proposed Regulation SE would require registered SBSEFs (or SBSEF applicants) to file documents with the SEC using the EDGAR system in Inline XBRL, a structured, machine-readable data language that is designed specifically for the accurate capture and communication of financial information. The requirement would facilitate access, retrieval, analysis, and comparison of the submitted information across different SBSEFs and time periods by the SEC and the public, which increases the informational benefits of various disclosure requirements.
Finally, proposed rules 818 to 831 of Regulation SE would require SBSEFs to comply with the 14 “Core Principles” set forth in Section 3D(d) of the Exchange Act in order to register and maintain registration. Under Section 3D of the Exchange Act, an SBSEF would be required to submit a new Form SBSEF when requesting registration with the SEC.
The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register or June 6, 2022 (or 60 days after publication of the proposing release on the SEC’s website, whichever is longer). For more information on how to submit comments, refer to the Rule Proposal on the SEC’s website.