Extra comments may be sought for proposed swaps rules

The Securities and Exchange Commission (SEC) has scheduled a meeting for Oct. 11, 2018, to consider asking for additional comments on three previously issued rule proposals for financial swaps.

The SEC may also revise the proposals in addition to requesting additional comments for them.

The three proposals are Release No. 34-68071, Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Release No. 34-69490, Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, and Release No. 34-71958, Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers.

The SEC proposed the rules to carry out Dodd-Frank Act mandates to regulate the over-the-counter derivatives markets following the 2008 financial crisis. PL111-203

Release No. 34-68071 was published in October 2012 with proposed capital and margin requirements for financial companies that deal and trade swaps. If the rule becomes final, broker-dealers that trade swaps would be required to hold capital reserves of the greater of $20 million or 8 percent of the collateral they hold to cover trading losses. Swap dealers will also be subject to margin requirements and have to collect collateral from trading partners for swaps that do not get cleared through a central system.

The SEC in May 2013 issued Release No. 34-69490 to propose letting U.S. companies in some circumstances follow rules set by foreign regulators for their derivatives businesses. Derivatives trades often involve parties in different nations, and traders may be subject to multiple sets of rules. The SEC proposed implementing “substituted compliance” to take into account other countries’ regulatory regimes. The approach would let a foreign market participant comply with the regulations of its home country if they are comparable to SEC rules. If the regulations are not comparable, then the market participants would be required to follow SEC rules.

The commission said some multinational financial firms will not be treated as U.S. persons regardless of their location. In some cases, transactions by U.S. banks through foreign branches would be treated similar to transactions conducted by foreign citizens or companies.

The SEC’s April 2014 proposal in Release No. 34-71958 largely deals with record-keeping and reporting requirements for swap dealers and major trading firms. At the upcoming meeting, the SEC plans to deal with a provision from the proposal that deals with the additional capital charge for swap broker-dealers.

The SEC’s plans to reconsider the proposed rules comes following a written request from financial industry trade groups that asked for revisions to the margin requirements.

In September 2018, the International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association, the American Bankers Association, the Global Foreign Exchange Division of the Global Financial Markets Association and the Institute of International Bankers, wrote that the Basel Committee on Bank Supervision and the International Organization of Securities Commissions in September 2013 established standards for margin requirements for non-centrally cleared derivatives that were to be phased in over time.

The groups said the final phases go into effect in 2019 and 2020, and they need international regulatory agencies to help them comply with the rule changes.

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