SEC Adopts Regulatory Framework for SBS Execution Facilities
The SEC adopted final rules implementing a framework for registering and regulating security-based swap execution facilities ("SBSEFs").
The SEC said that the purpose of the final rules were to (i) establish a new scheme for the registration and regulation of SBSEFs, (ii) create exemptions from the definition of "exchange" under the Exchange Act for SBSEFs that provide execution only for SBS (not other securities), (iii) create exemptions from certain requirements applicable to "brokers" under the Exchange Act for registered SBSEFs and (iv) adopt new rules of practice pursuant to which users can request SEC review of SBSEF actions (see previous coverage).
The SEC modified provisions in the final version of the rules regarding the definition of "block trade" and the treatment of package transactions and SBS transactions that are not accepted for clearing by a clearing agency. (The rulemaking does not define "block trade" at this time.) The final rules allow SBSEFs to contract with designated contract markets.
The final rules go into effect 60 days following publication in the Federal Register.
Statements
SEC Chair Gary Gensler said that the final rule "bring[s] together buyers and sellers with transparent, pre-trade pricing," thereby lowering risk for investors. He stated that the final rule also aligns the SEC's SBSEF regulations with the CFTC's, which Mr. Gensler argued will "minimize the new burdens on market participants through a framework with which they already comply."
In dissent, SEC Commissioner Mark T. Uyeda stated that he has "unaddressed concerns" regarding the rule adoption and that a "more comprehensive statement" is forthcoming.
Commentary
For better and for worse, the 604-page adopting release emphasizes harmonization with CFTC rules where possible. The SEC specifically declined to make changes to a number of concerns that had been raised as to the CFTC approach over the years, relying in significant part on the need for coordinated results.
On cross-border aspects of the rules, the SEC continues to apply a "territorial" approach for SBS regulation and will apply the trade execution requirement if a transaction is "arranged, negotiated or executed" by personnel in the United States, even where the counterparties to the transaction are each a "non-U.S. person" under SEC rules. In response to concerns about basis from CFTC requirements, the SEC said that foreign venues who rely on CFTC exemptions or similar relief could apply to the SEC for relief under Rule 833.