SEC Chair Mary Schapiro gave her thoughts on some of the implications of the Dodd-Frank Act for security based swaps in remarks given to the Security Traders Association. Ms. Schapiro noted “Title VII of the Dodd-Frank Act provides a comprehensive framework for the regulation of the over-the-counter derivatives market. It specifies the jurisdiction of the CFTC and SEC over the markets in swaps and security-based swaps, respectively. It creates new classes of market participants. And it provides for the registration and regulation of these market participants and of other aspects of the OTC derivatives market.”
One of the new types of market participant created by the Dodd-Frank Act is the security-based swap execution facility, or SEF.
One of the key principles in any market is fair and open access. The Dodd-Frank Act provides that a SEF must “provide market participants with impartial access” and may not adopt any rules or take any actions that result in any unreasonable restraint of trade or impose any material anticompetitive burden on trading or clearing. As the market structure develops, the SEC will work to ensure that all market participants have a fair opportunity to compete in the market, Ms. Schapiro stated.
Ms. Schapiro noted central clearing should significantly mitigate counterparty risks in the security-based swaps market. Fair and open access to central clearing will be a key element to the new market structure for security-based swaps.
Closely related to access is the question of how to structure SEF operations to maximize transparency and competition, and thus liquidity. According to Ms. Schapiro, one way to promote these goals is to provide for greater pre-trade transparency of trading interest, while at the same time encouraging greater participation by market participants willing to provide liquidity. Any trading systems intended to qualify as SEFs should support these goals.
Another important element of a new security-based swaps market will be the increased transparency that comes from real-time reporting of all transactions. The Dodd-Frank Act provides that all security-based swaps – whether cleared or uncleared, executed over the counter or on a SEF or exchange — must be publicly reported in real time.
Many key details of this regime remain to be fleshed out in greater detail through the rulemaking process. Ms. Schapiro believes that real-time reporting will have a profound and positive effect on the market. She noted “all market participants will have the same knowledge of executed trades. Customers and end-users will be able to see whether quotes they receive from dealers approximate the last-sale prices, and if they do not, ask why their quotes are not closer to the last-sale prices.”
Check dodd-frank.com frequently for updates on the Dodd-Frank Act.