Countdown Begins for SEC Swap Reform Implementation

For any of you veteran Dodd Frankers out there – drum roll! – the SEC have just published their Final Rules for the ‘Cross-Border Application of Certain Security-Based Swap Requirements’ in the Federal Register.

Five years or so ago everyone would have been all over this but I wouldn’t be surprised now if folks have completely forgotten this was ever coming and that one day they might need to register to be a Security-Based Swap Dealer and so let me explain.

Wind back the clock to 2010 when the Dodd Frank Act was signed into legislation (yes, it really was that long ago) and you may recall that Dodd Frank divides regulatory authority of swap reform between the CFTC and the SEC – unhelpfully, there is no one-stop-shop like there largely is with ESMA and EMIR.

To chip it up on how this works, the CFTC has regulatory authority over Swaps regulated under the Commodity Exchange Act whilst the SEC has regulatory authority over Security-Based Swaps regulated under the Securities Exchange Act, the latter largely pertaining to any “agreement, contract, or transaction” that is a “swap” and is based on:

(I) an index that is a narrow-based security index;
(II) a single security or loan; or
(III) an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index.

In plainer English to you and me, that’s things like security indices with nine or fewer component securities, single name swaps, single name CDS and TRS on a single security or loan.

The way the two agencies then progressed their Dodd Frank book of work was for the CFTC to come out all guns blazing with their rulemaking – literally – and pretty much wrap it all up over the next 24 months, whilst the SEC took a more ‘measured approach’ – literally – and did pretty much nothing, other than stress a lot about not having the resources to do it.

In terms of lessons learnt, the CFTC have probably regretted being quite so gung-ho on the off as they have subsequently had to issue in excess of 530 No-Action Letters, Interpretative Letters, Advisory Letters and Guidance Letters in order to correct the mess that followed, or at least that’s how many I’ve tracked in my spreadsheet over the last 8 years or so!

Now wind forward the clock – to 4th February 2020 to be precise – and the SEC, by publishing their cross-border rules in the Federal Register, have finally completed enough of their Dodd Frank swap reform rulemaking to allow Security-Based Swap Dealers to kick off the registration and regulation process.

Hard to believe as that may be, the reality is that for the two dozen or so banks that are expected to need to register as Security-Based Swap Dealers, an 18 month clock is now ticking and for all the ball ache that firms had to go through with CFTC Swap Dealer registration and regulation, that’s about to start all over again.

But what I find most disorientating about all of this is how quiet it’s been – earily quiet.

I mean, if ESMA had announced something as important as this about MiFID, for example, my inbox would be completely full with alerts and LinkedIn would have been on fire but for such a huge step forward in SEC rulemaking, apart from a single email from the great folks at Cadwalader Cabinet, I’ve heard nothing – absolutely nothing!

And that kind of worries me, and should probably worry you too if you need to get onboard with something as substantial as this.

So what would I be calling out about this rulemaking for firms that need to be mobilising an implementation team to get this one across the line?

  • First, having likely been focused for the last 5 years or so on EU regulations, you’re going to have to switch back to US-stylee rules which require a completely different mind set. On top of that, as the Dodd Frank Act amends the Securities Exchange Act, this thing is packed to the gunnels with legislation dating back to 1934 and so you’re going to have to dissect the Dodd Frank Act and create a complex mapping table in order to isolate just what is relevant to swap reform in the Securities Exchange Act and what isn’t. Hopefully, you can replicate the approach that you took for CFTC swap reform and the Commodity Exchange Act. Or maybe you didn’t get round to doing that, but either way, there is no standalone regulation like there was with EMIR.
  • Second, just like the Commodity Exchange Act, the Securities Exchange Act is notoriously difficult to navigate, let alone read – who writes thus stuff?!
  • Third, just like the CFTC, the SEC aren’t shy of a prolific use of paper. The SEC’s rulemaking amounts to many, many thousands of pages of pre-amble and regulations that are going to need to be digested and processed. Have you even started yet?!
  • Fourth, if you haven’t started yet, how do you track all these rules, least of all can you still find them? I say that last part quite flippantly because the dedicated SEC Dodd Frank website for all this information – let’s say your golden source – is not only inaccurate, but rules are missing and permalinks to rules are broken or dead. Still, not as bad as the CFTC’s Dodd Frank website, but that’s a whole new blog on its own! Not much you can do about that unless you logged this stuff when it was published but I’ve always thought these CFTC rule tracking deficiencies to be a tad rich given how NFA enquiries always focus on ‘detail’!
  • Fifth, whilst the SEC have tried harmonising their rulemaking with existing CFTC rules, they couldn’t quite go the whole way. To me, trying to find that delta will mean having to go back to CFTC rulemaking and conduct a gap analysis with what you’ve already done.
  • Sixth, following on from the point above, how many folks from Dodd Frank CFTC Programmes have you still got left in the building to do this or are project teams going to be starting from scratch? If the first answer to “don’t we already do this under CFTC rules?” is “dunno” or “can’t remember”, you’re really going to have a problem.
  • Finally, with SEC rules having been in a coma for the last 8 years the clock is actually now ticking and 18 months to implement something as complex as this is not that much time at all.

Tick tock!

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