SEC Chair Gensler Highlights Agency Actions on Security-Based Swaps
In a speech before the American Bar Association's Derivatives and Futures Law Committee, SEC Chair Gary Gensler addressed current SEC initiatives on security-based swaps ("SBS"), including reporting, clearing, swap execution facilities ("SEFs") trading, and substituted compliance.
On rules for security-based swap dealers (which are scheduled to go into effect later this year), Mr. Gensler stated that the SEC expects that 45 to 50 entities will register with the SEC, and highlighted various requirements that will be imposed on such firms, including counterparty protections, capital and margin requirements, internal risk management, supervision, recordkeeping and reporting procedures. Mr. Gensler also discussed the SEC's work to grant substituted compliance with foreign authorities. This would allow affected entities the ability to comply with rules from their home jurisdictions while meeting U.S. regulations. Thus far, a determination order has been granted for German firms and there are applications that have been published for comment regarding the UK and France. (A page on the SEC site highlights actions taken so far.) Mr. Gensler said that the SEC staff is working to finalize substituted compliance recommendations and to enter into memoranda of understanding with foreign regulatory authorities "expeditiously."
In addition to the dealer rules, Mr. Gensler highlighted a number of other items that the SEC is considering for SBS:
-
Central Clearing. Mr. Gensler noted that three clearinghouses currently voluntarily clear SBS and highlighted the "risk reduction" aspects of central clearing.
-
Trade Reporting. The SEC regime for trade reporting, under Regulation SBSR, begins to go into effect on November 8, 2021, and Mr. Gensler observed that public dissemination of certain SBS data will commence on Feb. 14, 2022.
-
Position Limits and Disclosures. Highlighting the recent collapse of Archegos Capital Management, Mr. Gensler commented that SEC staff has been directed to consider new rules under SEA Section 10B, which authorizes the SEC to establish position limits and large trader reporting requirements for SBS.
-
SEF Trading. Mr. Gensler said that the SEC staff is working on considering how best to harmonize requirements for SBS execution facilities with the SEF regime adopted by the CFTC.
-
Anti-Fraud and Anti-Manipulation. SEC staff has been asked to make recommendations on proposed anti-fraud and anti-manipulation rules under SEA Section 9(j).
In addition to the SBS regime, Mr. Gensler also briefly addressed the "intersection of [SBS] and financial technology," including as to crypto-assets. Mr. Gensler focused on products that are "priced off of the value of securities and operate like derivatives." He said that securities law implications will be present whether these products are in the form of a "stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities."
Commentary
Much of Mr. Gensler's speech highlights matters that have been long in the works at the SEC when it comes to regulation of SBS dealers. It seems clear, however, that Mr. Gensler will look to the failure of Archegos and other historical events as evidence that there will be public benefits to increased transparency when it comes to transactions in SBS. Based on this speech and previously indicated directions to staff, the SEC will be focused on obtaining information regarding positions of non-dealer market participants. Mr. Gensler's comments on central clearing and SBS execution facilities are also notable, though he was less committal on particular actions. The prospect of increased central clearing and exchange trading of SBS has not been a focal point for the SEC in recent years.