The SEC recently took a number of actions related to security based swaps.
Announcement of Guidance to be Issued on Effective Dates
The SEC said it is taking a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act – and to provide appropriate temporary relief.
Title VII is the portion of the Dodd-Frank Act that establishes a comprehensive framework for regulating over-the-counter derivatives. In particular, it authorizes the SEC to regulate “security-based swaps” while also authorizing the CFTC to regulate other swaps. The portion of Title VII referred to as Subsection B, which deals with the new regulatory regime for security-based swaps, will take effect on July 16 (360 days after the date of the Dodd-Frank Act’s enactment).
The SEC will:
- Provide guidance regarding which provisions of Subtitle B of Title VII will become operable as of July 16, and, where appropriate, provide temporary relief from several of these provisions.
- Provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions of the Exchange Act that would otherwise apply to security-based swaps on July 16. Under Dodd-Frank, security-based swaps would be included in the definition of “security” under the Exchange Act. While such swaps will be subject to provisions addressing fraud and manipulation, the SEC intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the SEC can consider, what if any further guidance or action is required.
- Take other actions such as extending existing temporary rules under the Securities Act, the Exchange Act, and the Trust Indenture Act, and extending existing temporary relief from exchange registration under the Exchange Act. This will help to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
Proposed Exemptions for Securities Based Swaps Issued by Clearing Agencies
The SEC has issued proposed rules that would provide certain clearing agencies with exemptions from the registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 for security-based swaps that they issue.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which established a comprehensive framework for regulating the over-the-counter swaps markets, envisioned that certain security-based swaps would be cleared through a clearing agency. The proposed exemptions would facilitate the clearing of such security-based swaps.
A clearing agency generally acts as a middleman between the parties to a transaction, and when providing central counterparty services, assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide benefits such as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.
The proposed rules would exempt transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.
On several previous occasions, the SEC has acted to facilitate clearing of certain credit default swaps by clearing agencies functioning as central counterparties. Among other things, the SEC previously adopted temporary rules that would exempt credit default swaps from these same registration and qualification requirements. The new proposed rules would create permanent exemptions that would cover these credit default swaps and the security-based swaps brought in through the Dodd-Frank Act and, as a result, supplant the temporary rules.
Because the current termination date for the temporary rules – July 16, 2011 – is expected to pass before the proposed exemptions are adopted, the SEC to extend the temporary rules in order to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
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