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SEC Proposes Rules For Swaps Dealers

by Glen Shapiro, LawAndTax-News.com, New York

23 October 2012


The United States Securities and Exchange Commission (SEC) has voted unanimously to propose capital, margin and segregation requirements for security-based swaps dealers and major security-based swap participants.

The proposed rules are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorized the SEC and other regulators to put in place a comprehensive framework for regulating the over-the-counter swaps markets, including margin and capital requirements to help ensure the safety and soundness of security-based swap dealers and major security-based swap participants.

Security-based swaps are derivatives whose value is ‘derived’ from a security as the underlying asset. Such swaps transfer market risk or credit risk between two counterparties, and allow one of the parties to obtain a market or credit exposure without actually owning the underlying asset.

The margin rules are required to be appropriate for the risk associated with security-based swaps that are not “cleared” by a security-based swap clearing agency, and segregation rules are intended to facilitate the prompt return of customer property to customers before or during a liquidation proceeding if a security-based swap dealer fails.

The SEC’s proposed rules therefore determine how much capital dealers in security-based swaps need to hold; when and how those dealers need to collect collateral, or margin, to protect against losses from counterparties; and how those dealers segregate and protect funds and securities held for customers.

The SEC has also proposed capital and margin requirements for major security-based swap participants - entities that do not act as dealers but hold large positions in security-based swaps. Further, the SEC will consider proposing rules to increase capital requirements for the largest broker-dealers that use internal models in calculating how much capital they need to hold.

“The SEC has now proposed - and in some cases adopted - substantially all of the rules that create the new regulatory regime for derivatives within our jurisdiction,” said SEC Chairman Mary L. Schapiro. “These rules are intended to make the financial system safer and the derivative markets fairer, more efficient, and more transparent.”

“In framing these proposals,” she added, “we also have been cognizant of corollary rules that have been proposed by the Commodity Futures Trading Commission and the bank regulators for entities under their jurisdiction. These rules reflect both similarities and differences with those advanced by the other regulators. We will seek and consider closely public comment on those questions, and of course we will also work closely with our fellow regulators as we do so.”

The SEC will be seeking public comment on the proposed rules for 60 days following their publication in the Federal Register.

TAGS: investment | law | capital markets | United States | regulation | alternative investment

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