SEC adopts rules for efficiency of securities-based swaps

The Securities and Exchange Commission has adopted new rules that establish “timely and accurate” trade acknowledgment and verification requirements for security-based swap entities and their transactions. The rules are designed “to promote the efficient and effective operation of the SBS market.”

While the Commodity Futures Trading Commission maintains oversight over most derivatives transactions, the SEC holds jurisdiction over a small portion of the marketplace, including security-based and credit-default swaps, transactions that contributed to the 2008 financial crisis.

“These rules will result in more accurate and timely documentation for security-based swap transactions, which is a cornerstone of effective risk management,” said SEC Chair Mary Jo White. “They mark another significant step in completing the comprehensive regulatory framework for security-based swaps required by the Dodd-Frank Act.”

Under the new rules, SBS entities must provide a trade acknowledgment that contains all of the terms of the transaction.  Specifically, the rules require an SBS entity to:

Provide a trade acknowledgment electronically to its transaction counterparty promptly, and no later than the end of the first business day following the day of execution

Promptly verify or dispute with its counterparty the terms of a trade acknowledgment it receives

Have written policies and procedures in place that are reasonably designed to obtain verification of the terms outlined in any trade acknowledgment that it provides

The final rules exempt certain transactions that are processed through a registered clearing agency, or executed on a SBS execution facility or national securities exchange. There is also an exemption from the requirements of Exchange Act Rule 10b-10 for broker-dealers who are SBS entities and satisfy the trade acknowledgment and verification requirements in the final rules. In addition, the final rules address the potential availability of substituted compliance in connection with these requirements. 

The final rules are effective 60 days after publication in the Federal Register.