U.S. SEC Unveils Rules To Better Oversee Security-based Swap Execution

A U.S. markets regulator on Wednesday voted to propose new rules that would require platforms that execute trades of security-based swaps to register with the agency in a bid to increase transparency of the over-the-counter derivatives market.

The proposals from the U.S. Securities and Exchange Commission (SEC) would fulfill a mandate under the Dodd-Frank Financial Reform Law, passed in the aftermath of the 2007-09 global financial crisis, to bring clearer oversight to the opaque multitrillion-dollar derivatives market, the agency said.

The measures, which are subject to public consultation, would require platforms known as swaps execution facilities (SEF) to register with the SEC and would see the agency more closely regulate platforms that trade security-based swaps.

Wednesday's package of proposals, known as Regulation Swaps Execution, was voted on unanimously by the agency's three Democratic officials and its lone Republican commissioner.

They would better harmonize the SEC's rules with a similar but more sweeping rule introduced by the Commodities Future Trading Commission (CFTC).

While the CFTC oversees all financial contracts in which two counterparties agree to exchange or "swap" payments with each other as a result of changes in interest rates or commodity prices, the SEC's rules would focus on swaps based on a security or a credit default swap.

SEC Chair Gary Gensler said the rules would work to bring together buyers and sellers with transparent, pre-trade pricing, lowering risk in the marketplace, and would ultimately protect investors.

The SEC's new proposals would see SEFs implement a version of the so-called trade execution requirement - and its cross-border application - which makes it unlawful to engage in a swap transaction unless it is first submitted for clearing to a derivatives clearing organization.

The move aims to mitigate conflicts of interest at newly registered security-based SEFs, exchanges and clearing agencies and would promote competition and market integrity, the SEC said.

The measures would not apply to platforms already registered with the SEC as a clearing agency and those whose operations are designed to further the accuracy of end-of-day valuations, it added.

Industry groups praised the SEC's new proposals to build out the regulatory framework.

Providing broader access to all market participants and harmonizing the regulatory framework with the CFTC would promote more "fair, open, competitive and transparent markets," said Bryan Corbett, who leads the Managed Funds Association, a Washington-based group representing hedge funds.