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SEC Adopts Security-Based Swap Confirmation Rules

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

The SEC adopted Securities Exchange Act Rules 15Fi-1 and 15Fi-2, which require that security-based swap dealers ("SBSDs") and major SBS participants ("MSBPs" and, collectively, "SBS Entities") provide and verify trade acknowledgments in security-based swap transactions. The SEC also amended Securities Exchange Act Rule 3a71-6 to address the potential availability of substituted compliance in connection with the trade acknowledgment and verification requirements.

The final rules require an SBS Entity to, among other things:

  • promptly and electronically submit a trade acknowledgment to its counterparty no later than by the end of the first business day following the day of execution;

  • promptly verify or dispute the terms of trade acknowledgment received with its counterparty; and

  • maintain written policies and procedures reasonably designed to obtain verification of terms outlined in any trade acknowledgment that it provides.

The final rules also exempt broker-dealers who are SBS Entities and satisfy the final rules' trade acknowledgment and verification requirements from the confirmation requirements under Exchange Act Rule 10b-10 requirements.

The final rules will become effective after 60 days following their publication in the Federal Register.

Commentary

The SEC noted that its modifications to the 2011 proposal were, inter alia, intended to align the rules with the analogous CFTC requirements for swap confirmations. Notable aspects of the SEC final rules include the following:

  • An SBS Entity is required to deliver a trade acknowledgment as soon as practicable, but no later than the end of the first business day following the day of execution. This period is similar to the one that is allowed under CFTC Reg. 23.501(a), although, unlike the CFTC, the SEC did not make distinctions based on the types of transactions and did not adopt a phase-in compliance schedule for the timing requirements.

  • The acknowledgment and verification requirements are triggered by the "purchase" or "sale" of an SBS. The SEC emphasized that certain types of corporate actions would not trigger the acknowledgment and verification requirement (see Adopting Release at p. 47). Worth noting, however, are "other amendments and modifications" that include a "novation, assignment, unwind or termination (prior to the scheduled maturity date)" and might trigger the rules. The SEC contrasted this type of trigger with one that appears in the recently-adopted business conduct rules, and stated that the business conduct rules focus on whether there is a "new SBS," not whether there is a purchase or sale. Id. at n. 146.

  • The trade acknowledgment now is required to disclose "all the terms" of the transaction, rather than the previously specified enumerated terms as proposed.

  • The adopted verification requirement is a "policies and procedures" requirement that bears similarities to CFTC Reg. 23.501; that is, SBS Entities must have procedures in place "reasonably designed to obtain prompt verification." The SEC addressed the use of negative affirmation policies, and indicated that it would consider such policies "reasonable" if they require the counterparty to be bound by negative affirmation before or at the time of execution, and if they provide a reasonable post-execution period during which a counterparty may dispute or otherwise respond to the policies. (See Release at p. 48.)

In contrast to the CFTC, the SEC views the confirmation rules as "entity-level requirements" that should apply to an SBS Entity's foreign and domestic business. However, the SEC also amended the existing substituted compliance rule (3a71-6) to allow certain non-U.S. SBS Entities to use substituted compliance to satisfy the new confirmation requirements.

A note about compliance dates: While the rules will become effective 60 days after their publication date in the Federal Register, the compliance dates remain tied to registration. As the SEC reiterates on p. 80, the registration requirements remain tied to the completion of three additional rulemaking efforts: (i) capital and margin, (ii) recordkeeping and reporting, and (iii) a process for applying for statutory disqualification waivers for associated persons.

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