The Securities and Exchange Commission (SEC) has adopted a package of new rules and rule amendments for registration of Security-based swap dealers (SBSD) under the Dodd-Frank Act.[1] These rules establish a framework for the regulation of margin, capital, segregation, recordkeeping and reporting and business conduct. This action by the SEC follows previous Commodity Futures Trading Commission (CFTC) rule making which set similar requirements for swap dealers and major swap participants.[2] It is expected that swap dealers will leverage their implementation of the CFTC rules as a point of reference when addressing the SEC rules. However, this is not a cause for complacency. To ensure compliance by the October 2021 registration compliance date, firms should act now by assessing their security swap-based activities and aiming to create an effective compliance system.

In the areas of business conduct, margin and risk mitigation the rules adopted by the SEC and CFTC  differ in some ways that merit careful attention. For example, the business conduct rules adopted by both agencies require swap dealers and security based swap dealers in some situations to provide a higher duty of care to “special entities.” The definitions of special entities and the situations where a higher duty of care is owed differ under the two set of rules.  The CFTC rules provide that  certain employee benefit plans must “opt in” to obtain the protections provided under its regulations to special entities. On the other hand, under the SEC rules,  those same employee benefit plans automatically get the benefits of being treated as special entities so long as they do not opt out.

One way swap dealers, in many cases, have reduced their risk in this area is by obtaining representations from their counterparties that they are not a special entity within the CFTC’s definition. It is expected that security based swap dealers will take a similar approach and obtain representations from their counterparties that they are not special entities as defined by the SEC rules.

In terms of margin requirements, the SEC rules require initial margin to be segregated with a third party custodian while the CFTC rules do not. In addition, the SEC rules allow a broader range of collateral types to be posted for initial and variation margin.

Lastly, in the risk mitigation area, the SEC rules require an independent auditor to periodically audit the documentation policies and procedures of each SBSD.The CFTC rules permit an internal or external auditor to perform the audit.

The International Swaps and Derivatives Association (ISDA) has established working groups to develop standard form of amendments needed to its Master Agreement or Credit Support Annex to address the SEC rules. The areas being focused on by the working groups include the SEC proposals relating to  Business Conduct and Margin. It is likely that one or more protocols may emerge from the working group discussions.

The implementation of the SEC rules will likely require amendments to the trading relationship documentation currently used by SBSDs. Each SBSD should be following or participating in industry discussions related to the development of  protocols and considering what updates may be required to their client disclosure forms and documentation templates.  In addition, each SBSD needs to consider how it will obtain any necessary representations from counterparties that decide not to adhere to the applicable protocols. In previous years, the SEC has fined firms and individuals significant sums for compliance failures. SBSDs should be aware of this and use it as an incentive to ensure compliance by October 2021.


[2] Federal Register, Volume 77 Issue 33 (Friday, February 17, 2012)

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