This week, nearly a year and a half after Dodd-Frank mandated the registration of those who sell derivatives, the SEC has begun to propose rules facilitating the registration of swap dealers and other market participants. Though the CFTC has regulatory authority over most types of derivatives, but the SEC specifically has jurisdiction over “security-based” swaps such as credit default swaps.
Under the SEC proposal, swap dealers and major swap participants will be required to register with the SEC and follow a compliance regimen that limits the risk they pose to the market as a whole. SEC officials say that the requirement will allow the agency to “evaluate the competence of swaps sellers and other market participants.” In addition to filing an SBSE (“Security-Based Swap Entities”) form, The rule also requires the appointment of a Chief Compliance Officer to oversee financial, operational, and compliance systems. Registrants based overseas would be required to appoint a U.S. agent and allow the SEC access to their books and records.
In order to limit market disruption, the SEC has included a provision for conditional registration. This would allow entities to register before the entire family of security-based swap rules have been implemented. The rules also take into consideration the shifting definition of terms like “major security-based swap participant” and others.
“We need to know whether a potential registrant can function without putting investors or markets at risk,” explained SEC member Elisse Walter and analogized the registration requirement to a driver’s license. SEC Chairman Mary Schapiro lauded the registration requirement as “a critical step toward better protecting investors. Today’s proposal draws from our experience with registration rules regarding broker-dealers – rules that are familiar to many market participants.” Only one SEC member, lone Republican Troy Paredes, objected to the measure. He views the proposal as a vague and burdensome to the industry. The SEC has opened the draft to comments for a period of 60 days.