Title VII of the Dodd-Frank Act establishes a comprehensive framework to regulate over-the-counter derivatives, authorizing the Commodity Futures Trading Commission to regulate “swaps,” and the SEC to regulate “security-based swaps.”
The SEC is requesting public comment on its plan to phase in final rules regulating security-based swaps and security-based swap market participants. The policy statement does not estimate when the rules would be put in place, but describes the sequence in which they would take effect. The phased-in approach is intended to avoid the disruption that could occur if all the new rules took effect simultaneously. To date, the Commission has proposed nearly all the rules required under the Act and already has begun to adopt those rules.
“The policy statement seeks to provide a ‘roadmap’ to market participants and the public on how we expect to implement the various regulatory requirements for this market,” said Chairman Mary L. Schapiro. “We look forward to public comment on our anticipated sequencing as we continue to adopt and implement the rules under the law.”
In addition, the policy statement discusses the timing of the expiration of the temporary relief the SEC previously granted to securities-based swaps market participants. The relief exempts these market participants from certain provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939. Much of this relief is due to expire when certain final rules under Title VII become effective.
The SEC will seek public comments for 60 days after the date of the policy statement’s publication in the Federal Register.
The compliance dates and an overview of the policy statement is provided below.
For the full pdf please go to www.sec.gov/news/press/2012/2012-111.htm and click on the appropriate link,
COMPLIANCE DATES FOR FINAL RULES APPLICABLE TO SECURITY-BASED SWAPS ADOPTED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 AND THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
AGENCY:Securities and Exchange Commission.
ACTION: Notice of statement of general policy with request for public comment.
SUMMARY: We are requesting public comment on a statement of general policy (“Statement”) on the anticipated sequencing of the compliance dates of final rules to be adopted by the Securities and Exchange Commission pursuant to certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Securities Exchange Act of 1934, as amended by those provisions (“Exchange Act”). These provisions establish a framework for the regulation of security-based swaps and security-based swap market participants under the Exchange Act. The Statement presents a sequencing of the compliance dates for these final rules by grouping the rules into five categories and describes the interconnectedness of the compliance dates for these rules, both within and among the five categories. The Statement also describes the timing of the expiration of the relief previously granted by the Commission that provided exemptions from certain provisions of the Exchange Act, the Securities Act of 1933, and the Trust Indenture Act of 1939.
DATES: Comments regarding the Statement should be received on or before [insert date 60 days from publication in Federal Register].
ADDRESSES: Comments may be submitted by any of the following methods:
• Use the Commission’s Internet comment form (http://www.sec.gov/rules/policy.shtml);
• Send an email to email@example.com. Please include File Number S7-05-12 on the subject line; or
• Use the Federal Rulemaking portal (http://www.regulations.gov). Follow the instructions for submitting comments.
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to File No. S7-05-12. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. We will post all comments on the Commission’s Internet website (http://www.sec.gov). Comments also are available for website viewing and printing at the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Ann Parker McKeehan, Special Counsel, Office of Derivatives Policy, Division of Trading and Markets, at (202) 551-5797, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549, or, with respect to the Securities Act of 1933, the Trust Indenture Act of 1939, and Exchange Act section 12, Andrew Schoeffler, Special Counsel, Office of Capital Markets Trends, Division of Corporation Finance,
at (202) 551-3860, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549.
I. BACKGROUND AND OVERVIEW OF STATEMENT
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Act”) into law.1 The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system.2 Title VII of the Dodd-Frank Act (“Title VII”) establishes a regulatory regime applicable to the over-the-counter (“OTC”) derivatives markets by providing the Securities and Exchange Commission (“Commission” or “we”) and the Commodity Futures Trading Commission (“CFTC”) with authority to oversee these heretofore largely unregulated markets.3 Title VII provides that the CFTC will regulate “swaps,” the Commission will regulate “security-based swaps,” and the CFTC and the Commission will jointly regulate “mixed swaps.”4
1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
2 See, e.g., Pub. L. No. 111-203, Preamble.
3 Generally, Subtitle A of Title VII creates and relates to the regulatory regime for swaps, while Subtitle B of Title VII creates and relates to the regulatory regime for security-based swaps.
4 Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System, shall further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” These terms are defined in sections 721 and 761 of the Dodd-Frank Act and the Commission and the CFTC have proposed to further define these terms in joint rulemakings. See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Release No. 34-63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) (“Entity Definitions Proposing Release”); and Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Release No. 33-9204 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011), corrected in Release No. 33-9204A (June 1, 2011), 76 FR 32880 (June 7, 2011) (“Product Definitions Proposing Release”). The rules further defining the terms “swap dealer,” “major swap participant,” “security-based swap dealer,” “major security-based
Title VII amends the Securities Act of 1933 (“Securities Act”)5 and the Exchange Act6 to substantially expand the regulation of the security-based swap (“SB swap”) market by establishing a new regulatory framework intended to make this market more transparent, efficient, fair, accessible, and competitive.7 The Title VII amendments to the Exchange Act require, among other things, the following: (1) registration and comprehensive oversight of security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”);8 (2) reporting of SB swaps to a registered security-based swap data repository (“SDR”), or to the Commission (if the SB swap is uncleared and no SDR will accept the SB swap), and dissemination of SB swap information to the public;9 (3) clearing of SB swaps at a registered clearing agency (or a clearing agency that is exempt from registration) if the Commission makes a determination that such SB swaps are required to be cleared, unless an exception from the mandatory clearing requirement applies;10
swap participant,” and “eligible contract participant” were adopted by the Commission on April 27, 2012 and published in the Federal Register on May 23, 2012. See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Release No. 34-66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (“Entity Definitions Adopting Release”). and (4) if an SB swap is subject to
5 15 U.S.C. 77a et seq.
6 15 U.S.C. 78a et seq.
7 See generally Subtitle B of Title VII.
8 See section 15F of the Exchange Act, 15 U.S.C. 78o-10.
9 See section 3(a)(75) of the Exchange Act, 15 U.S.C. 78c(a)(75) (defining the term “security-based swap data repository”); section 13(m) of the Exchange Act (regarding public availability of SB swap data); section 13(n) of the Exchange Act (regarding requirements related to SDRs); and section 13A of the Exchange Act (regarding reporting and recordkeeping requirements for certain SB swaps). See also Security-Based Swap Data Repository Registration, Duties, and Core Principles, Release No. 34-63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010); corrected at 75 FR 79320 (Dec. 20, 2010) and 76 FR 2287 (Jan. 13, 2011) (“SDR Proposing Release”); and Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, Release No. 34-63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 2010) (“Regulation SBSR Proposing Release”).
10 See section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-3(a)(1). See also Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical
the clearing requirement, execution of the SB swap transaction on an exchange, on a security-based swap execution facility (“SB SEF”) registered under the Exchange Act,11 or on an SB SEF that has been exempted from registration by the Commission under the Exchange Act,12 unless no SB SEF or exchange makes such SB swap available for trading.13 Title VII also amends the Securities Act and the Exchange Act to include “security-based swaps” in the definition of “security” for the purposes of those statutes.14
Since the Dodd-Frank Act was enacted, the Commission has adopted joint rules with the CFTC further defining the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and “eligible contract participant” As a result, “security-based swaps” are subject to the provisions of the Securities Act and the Exchange Act and the rules thereunder applicable to “securities.”
1. Rules prohibiting fraud and manipulation in connection with SB swaps; and has proposed rules in the following twelve areas required by Title VII:
Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, Release No. 34-63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010) (“Clearing Procedures Proposing Release”).
11 15 U.S.C. 78c-4.
12 Id. at 78c-4(e).
13 See section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g) and section 3C(h) of the Exchange Act, 15 U.S.C. 78c-3(h). See also section 3(a)(77) of the Exchange Act, 15 U.S.C. 78c(77) (defining the term “security-based swap execution facility”). See also Registration and Regulation of Security-Based Swap Execution Facilities, Release No. 34-63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (“SB SEF Proposing Release”).
14 See sections 761(a)(2) and 768(a)(1) of the Dodd-Frank Act (amending sections 3(a)(10) of the Exchange Act, 15 U.S.C. 78c(a)(10), and 2(a)(1) of the Securities Act, 15 U.S.C. 77b(a)(1), respectively). The Dodd-Frank Act also amended the Securities Act to provide that SB swaps could not be used by an issuer, its affiliates, or underwriters to circumvent the registration requirement of section 5 of the Securities Act with respect to the issuer’s securities underlying the SB swap. See section 768(a) of the Dodd-Frank Act (amending section 2(a)(3) of the Securities Act, 15 U.S.C. 77b(a)(3)).
15 See Entity Definitions Adopting Release.
16 See Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps, Release No. 34-63236 (Nov. 3, 2010), 75 FR 68560 (Nov. 8, 2010) (“SB Swap Antifraud Proposing Release”).
2. Rules regarding trade reporting and real-time public dissemination of trade information for SB swaps that would lay out who must report SB swaps, what information must be reported, and where and when such information must be reported;17
3. Rules regarding the SDR registration process and the obligations of SDRs, including confidentiality and other requirements with which they must comply;
4. Rules relating to mandatory clearing of SB swaps that would specify the process for a registered clearing agency’s submission for review of SB swaps that the clearing agency plans to accept for clearing and rules to establish a process for a registered clearing agency to file advance notices with the Commission pursuant to Title VIII of the Dodd-Frank Act;
5. Rules regarding the steps that a party electing to use the end-user exception to the mandatory clearing requirement must follow to notify the Commission of how it generally meets its financial obligations associated with non-cleared SB swap transactions when it is using SB swaps to hedge or mitigate commercial risk;
6. Rules regarding the confirmation of SB swap transactions that would govern the way in which certain of these transactions are acknowledged and verified by the parties who enter into them;
7. Rules defining and regulating SB SEFs, which would specify their registration requirements, establish the duties, and implement the core principles for SB SEFs specified in Title VII;
17 See Regulation SBSR Proposing Release.
18 See SDR Proposing Release.
19 See Clearing Procedures Proposing Release.
20 See End-User Exception of Mandatory Clearing of Security-Based Swaps, Release No. 34-63556 (Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010) (“End-User Exception Proposing Release”).
21 See Trade Acknowledgment and Verification on Security-Based Swap Transactions, Release No. 34-63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) (“Trade Documentation Proposing Release”).
8. Rules regarding certain standards that clearing agencies would be required to maintain with respect to, among other things, their risk management and operations;23
9. Joint rules with the CFTC further defining the terms “swap,” “security-based swap,” and “security-based swap agreement” and regarding the regulation of mixed swaps and SB swap agreement recordkeeping;
10. Rules regarding business conduct that would establish certain minimum standards of conduct for SBSDs and MSBSPs, including in connection with their dealings with “special entities,” which include municipalities, pension plans, endowments and similar entities;
11. Rules regarding the registration process for SBSDs and MSBSPs;
12. Rules intended to mitigate conflicts of interest at SB swap clearing agencies, SB SEFs, and exchanges that trade SB swaps. and
In addition, the Commission intends to propose rules establishing capital, margin, and segregation requirements applicable to SBSDs and MSBSPs pursuant to Exchange Act sections 3E
28 and 15F(e)29
22 See SB SEF Proposing Release. and rules regarding the reporting and recordkeeping requirements to which
23 See Clearing Agency Standards for Operation and Governance, Release No. 34-64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (“Clearing Agency Standards Proposing Release”).
24 See Product Definitions Proposing Release.
25 See Business Conduct Standards for Security-Based Swaps Dealer and Major Security-Based Swap Participants, Release No. 34-64766 (June 29, 2011), 76 FR 42396 (July 18, 2011) (“Business Conduct Standards Proposing Release”).
26 See Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Release No. 34-65543 (Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011) (“SB Swap Participant Registration Proposing Release”).
27 See Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Release No. 34-63107, (Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (“Proposed Regulation MC”).
28 15 U.S.C. 78c-5.
SBSDs and MSBSPs will be subject pursuant to Exchange Act section 15F(f).30 The Commission also intends to address the international implications of Title VII in a single proposal that would present an approach to the registration and regulation of foreign entities engaged in cross-border SB swap transactions, among other areas.31
Moreover, while not mandated by Title VII, the Commission has adopted exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act of 1939 (“Trust Indenture Act”) for SB swaps issued by certain clearing agencies satisfying specified conditions to facilitate the intent of Title VII with respect to the clearing of SB swaps.
The provisions of Title VII were generally effective on July 16, 2011 (360 days after the enactment of the Dodd-Frank Act, the “Effective Date”), unless a provision required a rulemaking, in which case such provision would go into effect “not less than” 60 days after publication of the related final rules in the Federal Register or on July 16, 2011, whichever is
29 Id. at 78o-10(e).
30 Id. at 78o-10(f).
31 The Commission also adopted an interim final temporary rule that required counterparties to SB swaps entered into prior to the date of enactment of the Dodd-Frank Act, the terms of which had not expired as of that date, to report certain information relating to such SB swaps to a registered SDR, after such registered SDR is operational, or to the Commission and to report information relating to such SB swaps to the Commission upon request. The Commission also issued an interpretive note to the rule requiring counterparties to retain information relating to the terms of such SB swaps. See Reporting of Security-Based Swap Transaction Data, Release No. 34-63094 (Oct. 13, 2010), 75 FR 64643 (Oct. 20, 2010). This interim final temporary rule was to remain in effect until the earlier of the operative date of the permanent recordkeeping and reporting rules for SB swap transactions to be adopted by the Commission or January 12, 2012. Commission staff currently is considering what further action, if any, to recommend the Commission take with regard to the interim final temporary rule and interpretive note.
32 See Exemptions for Security-Based Swaps Issued By Certain Clearing Agencies, Release No. 33-9308 (Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012). These exemptions supplant the temporary exemptions the Commission adopted to facilitate the operation of clearing agencies as central counterparties for eligible credit default swaps. See Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps, Release No. 33-8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009). See also Extension of Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps, Release No. 33-9232 (Jul. 1, 2011), 76 FR 40223 (Jul. 8, 2011) (extending the expiration date of the temporary exemptions until April 16, 2012).
First, the Commission provided guidance as to which of the requirements of the Exchange Act, as amended by Title VII, would apply to SB swap transactions as of the Effective Date and granted temporary relief to market participants from compliance with certain of those requirements. Because the Commission did not complete its rulemaking prior to the Effective Date, we took a number of actions intended to clarify which U.S. securities laws would apply to security-based swaps as of July 16, 2011 and to provide exemptions from certain provisions of the Securities Act, the Exchange Act, and the Trust Indenture Act.
34 As a result, SB swap market participants were not required to comply with substantially all of Title VII’s requirements applicable to SB swaps under the Exchange Act. The expiration dates of the temporary exemptions granted pursuant to the Effective Date Order are triggered by the effective or compliance dates for certain final rules required to be adopted by the Commission pursuant to Title VII.35
Second, the Commission approved an order granting temporary relief and providing interpretive guidance to make it clear that a substantial number of the requirements of the Exchange Act would not apply to SB swaps when the revised definition of “security” went into effect on July 16, 2011.
36 Additionally, this order provided temporary relief from provisions of the Exchange Act that allow the voiding of contracts made in violation of those laws.37
33 See section 774 of the Dodd-Frank Act, 15 U.S.C. 77b note. The
34 Order Pursuant to Sections 15F(b)(6) and 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps, and Request for Comment, Release No. 34-64678 (June 15, 2011), 76 FR 36287 (June 22, 2011) (“Effective Date Order”).
35 See Effective Date Order at 36306-7.
36 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, Release No. 34-64795 (July 1, 2011), 76 FR 39927 (July 7, 2011) (“Exchange Act Exemptive Order”).
37 Id. at 39930, 39940.
exemptions granted will expire upon the compliance dates of certain of the rules required to be promulgated pursuant to Title VII, including rules further defining the terms “security-based swap” and “eligible contract participant”
38 and the rules regarding the registration of SB SEFs.39
Third, the Commission provided, until the compliance date for the final rules to be adopted by the Commission further defining the terms “security-based swap” and “eligible contract participant,”
40 interim exemptions from all provisions of the Securities Act (other than the section 17(a) antifraud provisions), the registration requirements of the Exchange Act relating to classes of securities, and the indenture provisions of the Trust Indenture Act for those SB swaps that would have been, prior to the Effective Date, within the definition of “security-based swap agreement” under Securities Act section 2A41 and Exchange Act section 3A42 and are entered into solely between eligible contract participants (as defined prior to the Effective Date).43
As a result, pursuant to the interim exemptions, the offer and sale of such SB swaps between eligible contract participants may be made pursuant to exemptions under the Securities
38 Id. at 39938.
39 Id. at 39939.
40 Further definition of the term “security-based swap” was proposed in the Product Definitions Proposing Release and the term “eligible contract participant” was further defined in the Entity Definitions Adopting Release.
41 15 U.S.C. 77b(b)-1.
42 Id. at 78c-1.
43 Exemptions for Security-Based Swaps, Release No. 33-9231 (July 1, 2011), 76 FR 40605 (July 11, 2011) (“SB Swaps Interim Final Rule”). These interim exemptions will expire upon the compliance date for the final rules further defining the terms “security-based swap” and “eligible contract participant.” Further, the Division of Corporation Finance issued a no-action letter that addressed the availability of these interim exemptions to offers and sales of SB swaps that are based on or reference only loans or indexes only of loans. See Cleary Gottlieb Steen & Hamilton LLP (July 15, 2011) (“Clearly Gottlieb Letter”). We understand that Commission staff intends to withdraw the Cleary Gottlieb Letter upon the expiration of these interim exemptions.
Act without registration of the class under Exchange Act sections 12(a) and 12(g), and without qualification of an indenture under the Trust Indenture Act.
As previously announced, the Commission has been considering how to implement the new requirements that will be applicable to SB swaps pursuant to the rules described above in a practical and efficient manner that avoids unnecessary disruption to the SB swap market.
45 As noted in the Effective Date Order, the Commission has the ability to establish effective dates and compliance dates – which may be later than the effective dates – for provisions of Title VII that are subject to rulemaking.46
To engage the public on these issues, the staffs of the Commission and the CFTC held a two-day joint public roundtable on May 2 – 3, 2011, to discuss the sequencing of the implementation of the final rules to be adopted under Title VII. Given this ability, the Commission seeks to sequence the implementation of the final rules to be adopted pursuant to Title VII of the Dodd-Frank Act in an appropriate manner.
47 In connection with this roundtable, the Commission and the CFTC solicited comment on issues pertaining to the phased implementation of Title VII’s final rules.48
44 SB Swaps Interim Final Rule at 40611-2. Additionally, the Commission and the CFTC have received comment letters in response to specific rules proposed under and orders issued in connection with Title VII that address implementation issues pertaining to those rules, as well as implementation issues more generally.