The Securities and Exchange Commission (SEC) on Feb. 2, 2018, issued an order to extend a temporary exemption from certain requirements of the Securities Exchange Act of 1934 for financial swaps.
The exemption runs until Feb. 5, 2019, according to Release No. 34-82626, Order Extending Until Feb. 5, 2019, Certain Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Revision of the Definition of "Security" to Encompass Security-Based Swaps and Request for Comment. The previous exemption expired on Feb. 5, 2018 under Release No. 34-79833, Order Extending Certain Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Revision of the Definition of “Security” to Encompass Security-Based Swaps and Request for Comment, which was issued in January 2017.
The SEC has yet to finish work on the derivatives rules from the Dodd-Frank Act, including the capital, margin, and segregation requirements from Dodd-Frank Title VII, and it said the exemption is necessary “to avoid any potential market disruption stemming from the application of certain Exchange Act provisions and rules to security-based swap activities,” according to Release No. 34-82626. Sec. 7 of PL111-203.
Dodd-Frank revised the definition of “security” from the Securities Exchange Act of 1934 to include financial swaps and raised questions the agency wants to resolve before it completes the Dodd-Frank swaps rules, the SEC said in Release No. 34-82626. The exemption gives the SEC extra time to consider how expanding the definition of security will affect the markets and market regulation, and it is seeking public comment about whether it is necessary to continue the exemption.
The SEC first issued the temporary exemptions from the Exchange Act requirements in July 2011 in Release No. 34-64795, Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Pending Revision of the Definition of "Security" to Encompass Security-Based Swaps, and Request for Comment. The 2011 order maintained the regulatory status quo during the implementation process of the Dodd-Frank Act. Sec. 7 of PL111-203
The extension was continued in 2013 and 2014.
The Securities Industry and Financial Markets Association (SIFMA), which had first requested a permanent exemption in 2011, said again in 2012 and 2017 that a permanent exemption would help investment companies avoid disruptions to the swaps market or restrict investors’ ability to trade swaps. SIFMA said certain provisions of the expanded definition of a financial swap and financial swap dealer, such as the disclosure rules for issuers, are designed for traditional securities but unworkable for swaps. Some provisions such as options rules or short sale delivery requirements simply do not apply.
“Before the commission considers any permanent exemptive relief, the commission believes that additional time will be beneficial to evaluate the new regulatory regime and its impact on the market for security-based swaps once the commission has finalized its rulemakings,” the SEC said in Release No. 34-82626. “Therefore, at this time, the commission is not making a determination on whether permanent relief should be provided.”
Nihal Patel, an associate with the law firm Cadwalader, Wickersham & Taft LLP, said in a memo to clients that the SEC should not wait until the last minute to provide regulatory exemptions.
“It is not in the control of the industry to adopt rules to implement the relevant statutes, and it was totally unclear how the statutes would have been interpreted in the absence of implementing rules,” Patel wrote. “Given how much remains to be done, it is unlikely that the security-based swap rules will be ready in a year. The regulators should be poised to extend the next ‘deadline’ well before the drop dead date.”
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