SEC finally moves forward on single-name CDS dealer rules

More than eight years after the passage of the Dodd-Frank Act, the Securities and Exchange Commission is at last nearing completion of rules governing dealers in single-name credit-default swaps – but only after another round of consultation.

Commissioner Hester Peirce told a New York conference, organised by the International Swaps and Derivatives Association on October 4, that the SEC is working intensely on these rules and she hoped the results would be visible “in the coming weeks and months”.

The SEC has called an open meeting on October 11, to consider requesting more public comment on the capital, margin and segregation requirements for security-based swap dealers and major market participants, which will specifically focus on single-name CDS.

The SEC first proposed this rule six years ago, and the Commodity Futures Trading Commission and prudential regulators have mostly implemented their own derivatives regimes, as mandated by Title VII of Dodd-Frank. This includes the CFTC regime for CDS indexes, which was completed in 2012, with mandatory clearing introduced in July 2013.

In the meantime, the market structure itself has changed, with the Bank for International Settlements reporting earlier this year that more than half of all CDS contracts worldwide are centrally cleared on a voluntary basis.

“In light of these regulatory developments, changes in the markets and comments to the SEC, the commission considers whether to provide an additional opportunity for public comment on the proposed rules,” said Peirce.

The commission will now push ahead to complete its Title VII mandates, she said. While securities-based swap-dealer rules have largely been finalised, the commission has conditioned compliance on the finalisation of the three remaining rules.

In light of these regulatory developments, changes in the markets and comments to the SEC, the commission considers whether to provide an additional opportunity for public comment on the proposed rules

Hester Peirce, Securities and Exchange Commission

Apart from the capital, margin and segregation rules, the other two establish record-keeping and reporting requirements, and a proposal on a rule on Practice 194, concerning statutory disqualifications. These measures all need to be implemented to complete the registration requirements for swap dealers.

“Our dealer regime cannot be implemented till we finalise the three rules that I mentioned,” she said. Her priority now is to finalise the three remaining rules “expeditiously”.

“If the commentary for capital, margin and segregation is reopened, then I hope the commission will move quickly to finalise those rules and the books and record requirements after the comment period closes. And I would like to see a recommendation for the finalisation of Rule 194 in the coming months also,” Peirce said.

Other key issues

The commission is looking at other key issues that may present obstacles to an efficient transition to Title VII regulation, including its cross-border effects. Foreign securities-based swap dealers must certify, with the support of a legal counsel opinion, that they can and will provide the SEC with access to their books, and will allow on-site inspections. Industry bodies asked for clarification of the scope of these requirements in 2016.

“I’m also interested in exploring whether it may be appropriate to impose certain risk mitigation requirements, and whether the commission should consider possible alternative approaches to the so-called arranged, negotiated and executed requirements to reduce the possibility of market fragmentation,” said Peirce.

The rules requiring US regulatory oversight where any US personnel are involved in arranging, negotiating or executing a trade have resulted in increased segregation between US and non-US firms in overseas markets, as foreign clients try to avoid their trades becoming subject to dual supervision.

Peirce acknowledged the SEC has a game of catch-up to play, but there was an advantage to having taken so long: the SEC will be able to avoid unintended consequences of the CFTC’s more aggressive rulemaking. The agency can also plan to limit conflict with the rules already in place, to create a more harmonised regime.

In March, Risk.net revealed plans for the SEC and CFTC to co-operate on single-name CDS rules. In June, the two agencies unveiled an amended memorandum of understanding, designed to ensure regulatory alignment on the issue.

On a rule for mandatory clearing of single-name credit-default swap products, Peirce said only that the SEC has not yet proposed such a rule. As Risk.net has previously reported, such a rule was proposed in 2013, but never finalised.