‘Security-based Swaps Must Be Exempted from Registration Requirements’

Jack Humphrey, Regulatory journalist
June 10, 2011 /

Certain clearing agencies issuing registration requirements should spare security-based swaps from registering, the US Securities and Exchange Commission (SEC) has proposed.

The securities regulator wants exemptions for certain clearing agencies that are required to register under the Securities Act of 1933 and the Securities Exchange Act of 1934 for security-based swaps that they issue.

The SEC boasted of the proposals on November last year, saying they pave the way for a more transparent transaction in the swap market as they lay out “who must do security-based swap reporting, what information must be reported, and where and when it must be reported,” according to SEC chairperson Mary Schapiro.

Clearing agencies provide central counterparty services for parties engaging in a transaction. They assume the risks whenever there is a default.

When structured and operated appropriately, clearing agencies can provide benefits such as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.

The SEC noted that clearing agencies must clear certain security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets,” the SEC said.

The proposed exemptions would facilitate the clearing of such security-based swaps.

With the proposals, transactions by clearing agencies in these security-based swaps would be exempted from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act.

However, certain conditions must be met before these clearing agencies can avail of the exemption.

The SEC has previously acted to facilitate clearing of certain credit default swaps by clearing agencies functioning as central counterparties. For example, the SEC adopted temporary rules that would exempt credit default swaps from these same registration requirements and qualification requirements.

“The new proposed rules would create permanent exemptions that would cover these credit default swaps and the security-based swaps brought in through the Dodd-Frank Act and, as a result, supplant the temporary rules,” the SEC said.

The SEC intends to extend the temporary rules in order to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.

The temporary rules are set to be terminated on July 16, 2011, a date which is expected to pass before the proposed exemptions are adopted.

The extension of these temporary rules is part of a multi-step effort by the SEC to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Act – and to provide appropriate temporary relief.

The SEC seeks public comments on the proposed rules until July 25, 2011.


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