With a unanimous vote on Wednesday, the Securities and Exchange Commission moved forward with proposed rules detailing its efforts to reduce the risks posed by large, un-collateralized derivatives positions.
In response to the financial crisis, notably the $182 billion bailout of American International Group following crippling losses on credit default swaps, Title VII of the Dodd-Frank Act divided the obligation to craft new derivatives rules among the SEC, the Commodity Futures Trading Commission and banking regulators. The SEC's purview extends to securities-based derivatives.
Among the numerous rules detailed in the more than 500-page document released this week, the SEC would require that all securities-based swaps dealers to maintain at least $20 million (as high as $5 billion for the largest firms) of cushioning capital, in addition to 8% of the total margin for each individual transaction.
SEC Chairman Mary Schapiro said that, if passed, the proposed rules complete a “new regulatory regime” for derivatives within the Commission's jurisdiction.
The SEC had already finalized definitions of what constitutes a security-based swap and defined the key types of intermediaries in these markets. Proposed rules also address the governing of execution facilities, determining which security-based swaps would be required to be cleared through intermediary clearing agencies that assume the risk should there be a default, outlining the requirement to report trade information to data repositories, and business conduct standards for security-based swap dealers.
Schapiro said existing financial responsibility rules for broker-dealers “served as a starting point for [the new] proposals, not just because of familiarity with these rules, but also because of similarities between the financial markets for securities and security-based swaps.”
Bank regulators have already proposed capital and margin requirements for bank swap dealers, bank security-based swap dealers, bank swap participants, and bank major security-based swap participants. The CFTC has similarly proposed capital and margin requirements for nonbank swap dealers and nonbank major swap participants, issued segregation requirements for non-cleared swaps, and adopted segregation requirements for cleared swaps.
In response to the publication of a consultative document on margin requirements for non-centrally cleared derivatives by the Basel Committee and International Organization of Securities Commissions, the prudential regulators and CFTC re-opened their comment periods for capital and margin rule proposals.
SEC Commissioner Daniel Gallagher cautioned that “action taken by any of those other regulators can fundamentally affect what we are doing.” The new rules, however, finally inject the SEC into these ongoing conversations, he said.
The SEC's proposed rules will undergo a 60-day comment period.