SEC Proposes New Regulatory Framework for SBS Execution Facilities

Commentary by Nihal Patel

The SEC proposed a new regulatory framework for the registration and regulation of security-based swap execution facilities ("SBSEFs").

Under proposed Regulation SE, the SEC would:

  • establish a new scheme for the registration and regulation of SBSEFs;
  • adopt exemptions from the definition of "exchange" under the Exchange Act for SBSEFs that provide execution only for SBS (not other securities);
  • adopt exemptions from certain requirements applicable to "brokers" under the Exchange Act for registered SBSEFs; and
  • adopt new rules of practice pursuant to which users can request SEC review of SBSEF actions.

As part of the new proposal, the SEC withdrew previous related proposals, including (i) Regulation MC (relating to conflicts between clearing agencies, SBSEFs and exchanges trading SBS), (ii) the 2011 release for SBSEF registration and regulation, and (iii) aspects of an SEC cross-border proposal relating to SBSEFs and trade execution.

Comments on the proposal are due the later of (i) June 6, 2022 or (ii) 30 days following publication in the Federal Register.

Commissioner Statements

The SEC voted 5-0 to publish the proposal. Chair Gary Gensler supported the proposal and noted that it would "closely harmonize" the SEC approach with the CFTC framework. Commissioner Caroline A. Crenshaw also expressed support for the proposal, citing harmonization with CFTC rules and an expectation that "most, if not all entities" expected to register as SBSEFs will be registered as swap execution facilities with the CFTC.

Commissioner Hester M. Peirce stated that it makes sense to align the SEC's proposal to match CFTC policy, but said she would not have written the same set of rule if "writing them from scratch." Ms. Peirce expressed some concern that market participants may not agree with harmonization, and questioned whether "importing language and concepts" from the CFTC will have policy and operational consequences.

Commentary

The release is 524 pages. In short, this proposal (1) is largely a good thing if you are a fan of the CFTC regulatory regime for swaps; (2) could be painful to administer as a cross-border matter, particularly with the "ANE" concept re-emerging; and (3) remains incomplete in certain respects (in particular, the statutory trade execution requirement) until the SEC takes any action on clearing SBS. Here are a few items that jump out on initial consideration: 

  • Entities and Registration
    • The process for SBSEFs to list SBS and submit rule filings follows the CFTC approach for SEFs (in contrast to, e.g., the rule filing approach for securities exchanges). For new products, a 10-business-day period following "self certification" of filings would apply (rather than one business day under CFTC rules) with the SEC given the ability to stay listings for specified time periods
    • Clearing agencies that operate "forced trading sessions for SBS" are excepted from SBSEF status.
    • The release would provide for shorter form registration requirements for CFTC-registered SEFs.
  • Trading
    • Similar to CFTC rules, the SEC would require that SBSEFs offer an "order book" with an exception for "package transactions."
    • Similar to CFTC requirements, the SEC proposes to adopt different execution methods for "Required" and "Permitted" transactions with a similar approach to the use of "request for quote" systems and "block" trades. The proposal would use $5 million as a block threshold for credit SBS, with no block thresholds for equity SBS.
    • Similar to CFTC rules, the proposal would bar post-trade name give-up.
    • The SEC would require a similar process as the CFTC for making an SBS (that is already subject to mandatory clearing) "available to trade" (i.e., would permit self certification without express SEC action).
    • The SEC proposes similar exceptions from mandatory trading as under CFTC rules, including for "packages," certain "Treasury affiliates" and where clearing exceptions are relied upon.
  • Cross-Border
    • The trade execution requirement (where applicable for a product) would apply if one person to the SBS is (i) a U.S. person, (ii) a person guaranteed by a U.S. person, or (iii) a non-U.S. person that uses certain U.S. personnel to "arrange, negotiate or execute" a transaction.
    • Under the proposal, SBSEFs that permit any of the above-referenced "covered persons" can request exemption from SBSEF, exchange and broker status from the SEC. "Interested persons" (i.e., participants) would also be able to request exemptions. (The SEC observed that any relief provided would not extend to the "eligible contract participant" requirement in Section 6(b) of the Exchange Act.)
    • The SEC raises questions, but has not made formal proposals, to address circumstances where an SBS might be subject to trading requirements in more than one jurisdiction.

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