The Securities and Exchange Commission (SEC) on Wednesday proposed a new regulatory framework for security-based swap execution facilities (SBSEFs) that will require these entities to hire a chief compliance officer to oversee compliance with new rules.
The proposed rule would require SBSEFs to register with the agency and provide information about trades and potential conflicts of interest in collaboration with the SEC’s sister regulator, the Commodity Futures Trading Commission (CFTC). Having the SEC create a regulatory framework for the over-the-counter (OTC) derivatives markets is one of the last remaining unfulfilled mandates of the Dodd-Frank Act of 2010.
With the announcement, SEC Chair Gary Gensler said the agency is withdrawing all its previous rulemaking connected to SBSEFs, a nod to the successful implementation of a registration and regulation framework for many of these same entities by the CFTC.
“The proposal being considered today closely harmonizes with the CFTC’s framework,” Gensler said in a statement. “I believe aligning the SEC’s regime with the CFTC’s could garner many of the same benefits—bringing together buyers and sellers with transparent, pre-trade pricing; lowering risk in the marketplace; and protecting investors.”
New compliance requirements will be a key change for SBSEFs if the rule is finalized, particularly regarding reporting to the SEC on trading activity, ownership changes, and pending litigation; compliance with “rules regarding market access, trading, and trade processing, the operation of the SBSEF, the financial integrity of SBS on its facility, the exercise of emergency authority, and conflicts of interest”; and how the firm monitors “trading and market activity to prevent manipulation, price distortion, and delivery or settlement disruptions,” according to a fact sheet accompanying the proposed rule.
In addition, registered SBSEFs must prove they are in compliance with the 14 “core principles” set forth in Section 3D(d) of the Exchange Act, which cover many of the compliance requirements listed above. The 14th and final core principle is the designation of a chief compliance officer (CCO).
The CCO’s role is to “review the SBSEF’s compliance with the core principles; resolve conflicts of interest; be responsible for establishing and administering policies and procedures required under the core principles; establish procedures for the remediation of noncompliance; prepare and sign an annual report that describes the SBSEF’s compliance; certify that the report is accurate and complete; and submit the report to the commission,” the proposed rule said.
Ordering SBSEFs to hire a CCO to oversee compliance will “further the goal of moving SBS trading away from opaque and unregulated OTC markets and onto transparent and regulated markets,” the proposal said.
Gensler said the new rule “builds upon our existing efforts to strengthen transparency and integrity in the security-based swap market.” Those efforts include having security-based swap dealers register with the SEC, the reporting of post-trade transactions to a data repository overseen by the SEC, and three rules that required security-based swap dealers to publicly report information regarding large security-based swap positions.
When Gensler was named chair of the SEC in April 2021, he pledged to implement the remaining mandates of Dodd-Frank, much as he had done when he led the CFTC from 2009-14. Three of those remaining mandates touched the security-based swap market.
Gensler and the SEC have also proposed implementing several executive pay rules from Dodd-Frank, including pay vs. performance, executive pay clawbacks, and executive compensation votes. Another Dodd-Frank rule that would reform the short sale market was proposed in February.
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