SEC Crafts FinReg Plan

Terry Flanagan

Clearing and derivatives rules to be adopted in 2012.

The Securities and Exchange Commission has issued a timetable for publishing rules under the Dodd-Frank Act, for which both the SEC and Commodity Futures Trading Commission have been charged with formulating and implementing rules.

During the first half of 2012, the SEC will adopt rules regarding standards for clearing agencies designated as systemically important, mandatory clearing of security-based swaps, and the end-user exception to mandatory clearing of security-based swaps.

During the second half of 2012, the SEC will adopt rules on trade reporting, data elements, and real-time public reporting for security-based swaps, registration and regulation of security-based swap dealers and major security-based swap participants, and conflicts of interest for clearing agencies, execution facilities, and exchanges involved in security-based swaps

The Dodd-Frank Act divides regulatory authority over swap agreements between the CFTC and SEC (though the prudential regulators, such as the Federal Reserve Board, also have an important role in setting capital and margin for swap entities that are banks).

The SEC has regulatory authority over “security-based swaps,” which are defined as swaps based on a single security or loan or a narrow-based group or index of securities.

The CFTC has primary regulatory authority over all other swaps, such as energy and agricultural swaps. The CFTC and SEC share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.

The CFTC, SEC and U.S. prudential regulators also are consulting with non-U.S. regulatory authorities on the establishment of consistent international standards for products and entities in this area.

International regulators are cranking up efforts to achieve harmonization on critical areas of OTC derivatives reform, such as central clearing, trade reporting to repositories, and exchange and electronic platform trading.

Since mid-2011, the authorities have engaged in a series of bilateral technical dialogues on OTC derivatives regulation. SEC chairman Mary Schapiro has told Congress that achieving international harmonization is a high priority for regulators.

The Dodd-Frank Act specifically requires that the SEC, the CFTC, and the prudential regulators “consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards” with respect to the regulation of OTC derivatives.

Accordingly, the SEC has actively entered into bilateral and multilateral discussions with foreign regulators addressing the regulation of OTC derivatives, Schapiro said.

“Through these discussions and our participation in various international task forces and working groups, we have gathered information about foreign regulatory reform efforts, identified potential gaps, overlaps and conflicts between U.S. and foreign regulatory regimes, and encouraged foreign regulators to develop rules and standards complementary to our own under the Dodd-Frank Act,” said Schapiro.

Such efforts include frequent calls and meetings with the European Union and other major foreign regulatory jurisdictions in Asia and North America.

In addition, the SEC participates in the Financial Stability Board’s Working Group on OTC Derivatives Regulation, of which the SEC serves as one of the co-chairs on behalf of the International Organization of Securities Commissions (“IOSCO”), and serves as one of the four co-chairs of the IOSCO Task Force on OTC Derivatives Regulation.

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