SEC Commissioners' Opening Statements at SEC Opening Meeting on SD-MSP Rules; Webcast (with Lofchie Comment)

In Chairman Schapiro's opening statement, she provided some high-level background as to the SEC's proposed new rules that would establish capital, margin, and segregation for security-based swap dealers and major security-based swap participants. She noted that the new rules were intended to be modeled after the SEC's existing capital rules, but conceded that a lack of experience in establishing capital regulation as to swaps made this an inherently uncertain exercise. Chairman Schapiro notes that these proposals place heavy importance on requiring security-based swap dealers to hold liquid assets that are "readily available in times of crisis, given that security-based swap dealers regulated by the Commission, unlike dealers that are banks, will not have access to certain sources of bank funding."

Commissioner Gallagher further noted that these rules are a part of the ongoing U.S. and international process, in keeping with the CFTC's proposed capital and margin requirements (and segregation requirements) for non-bank registrants, and the prudential regulators' proposed capital and margin requirements for bank registrants.

Lofchie Comment: In tone and style at least, the SEC and the CFTC have taken very different approaches to their rulemaking. Both SEC Commissioners invite comment from market participants and other regulators; in this regard, Commissioner Gallagher describes the SEC's rule proposal as "add[ing the SEC's] voice to an ongoing conversation" on regulatory issues. By contrast, the CFTC has taken a more self-assured attitude in its rule making, even as to non-U.S. regulators, as reflected in Commissioner Chilton's recent speech in which he urged non-U.S. regulators to catch up to the CFTC.One very significant concern, and I think a very valid one, that SEC Chairman Schapiro raises is that because broker-dealers (and other non-bank dealers) do not have access to the same sources of funds as to which banks have access in times of crisis (implicitly, the Fed Window), the SEC must be more cautious in establishing capital and margin requirements; i.e., they must be higher. It thus follows that these higher capital and margin requirements will make it more expensive to trade. I really wonder if this is a good result for the U.S. financial system. Given that most swaps are in large part financing transactions, does it really make sense to force these trades out of banks (which are the logical sources of financing) into other entities? Further, when U.S.-based swaps dealers are competing abroad for business against non-U.S. banks, won't U.S. firms be at a significant competitive disadvantage? In any case, the decision to force swap dealer activities out of banks is not the SEC's decision; and, once that decision is made, Chairman's Schapiro's concern makes fundamental sense. But it follows that those firms that thought that Dodd-Frank would result in a reduction in trading costs may be disappointed as any such gain, if there is one, will be likely (fully, partially, or more than?) offset by the direct and indirect costs of capital and margin.