For several years Swap Dealers registered with the Commodity Futures Trading Commission (“CFTC”) have been awaiting action by the Securities and Exchange Commission (“SEC”) related to security-based swap dealers. While the wait is by no means over, on October 11, 2018 the SEC voted 4 to 1 to reopen the comment period for proposed rules on capital and margin requirements for security-based swap dealers and major security-based swap participants, and capital requirements for broker-dealers. The rule was originally proposed in October 2012, with additional proposals in May 2013 (relating to cross-border treatment) and in October 2014 (relating to requirements for non-bank security-based swap dealers). In addition to reopening the comment period, the SEC sought comment on a number of additional questions, including potential changes to the language of the proposed rules, many in response to comments the SEC received from the original proposal. Among other things, the SEC is seeking comment on:
- Potential changes to the proposed capital rules for security-based swap dealers and major security-based swap participants, including changes to how capital would be calculated;
- Potential changes to the proposed margin requirements, including allowing possible SEC approval of a uniform initial margin model, and potential exceptions to margin requirements;
- Potential changes to the proposed segregation requirements, including giving counterparties to non-cleared security-based swaps with a security-based swap dealers the option to allow the dealer to hold the initial margin, with requirements similar to broker-dealer customer protection rules; and,
- What the SEC should consider in making substituted compliance determinations for foreign security-based swap dealers.
Since the rule was initially proposed in 2012, the CFTC and prudential banking regulators have issued capital and margin rules for the swap dealing entities they regulate – harmonization with those rules is likely to be a significant consideration in the approach of the final rule. In addition, market participants have advocated for substituted compliance between the CFTC and SEC rules for swap dealers.
Chairman Jay Clayton and Commissioners Hester M. Peirce and Elad L. Roisman voted for the reopening of the comment period, and generally voiced support for the release and additional requests for comment. Commissioner Kara M. Stein voted to reopen the comment period, but criticized the process, arguing that the additional requests for comment were in fact a “shadow rulemaking” containing a “significant change in policy, which is cleverly hidden in questions” that, because not issued as a rule proposal, did not have the economic analysis that a typical SEC rule proposal would have. Commissioner Robert J. Jackson, Jr. voted against reopening the comment period, arguing that the proposal is essentially asking industry participants whether they should be allowed to take more risk, and that the potential paring back of capital and margin requirements based on the answers might introduce greater systemic risk.
Covington’s Futures and Derivatives practice has assisted multiple swap dealers with the implementation of CFTC requirements and will continue to follow these related developments at the SEC in order to assist clients with their security-based swap dealer registrations.