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February 15, 2019

SEC proposed a rule that would require the application of specific risk-mitigation techniques to portfolios of security-based swaps (SBS) that are not submitted for clearing. Comments should be received on or before April 16, 2019.

The proposal would establish requirements for each registered SBS dealer and each registered major SBS participant with respect to the following:

  • Reconciling outstanding SBS with applicable counterparties on a periodic basis
  • Engaging in certain forms of portfolio compression exercises, as appropriate
  • Executing written SBS trading relationship documentation with each of its counterparties prior to, or contemporaneously with, executing a SBS transaction

In addition, SEC proposed an interpretation to address the application of the portfolio reconciliation, portfolio compression, and trading relationship documentation requirements to cross-border SBS activities. SEC also proposed to amend Rule 3a71-6 to address the potential availability of substituted compliance in connection with those requirements. Moreover, the proposed rules would make corresponding changes to the recordkeeping, reporting, and notification requirements applicable to SBS entities. Finally, SEC requested comments on the way certain aspects of the proposed rules address how an SBS data repository could potentially satisfy its obligation to verify the terms of each SBS with both counterparties to the transaction. 

SEC had previously adopted rules requiring SBS entities to provide trade acknowledgments and to verify those trade acknowledgments with their counterparties to security-based swap transactions; however, it had not proposed rules concerning portfolio reconciliation, portfolio compression, or trading relationship documentation. By contrast, CFTC has implemented rules setting forth standards for the timely and accurate confirmation of swaps, addressing the reconciliation and compression of swap portfolios, and setting forth requirements for documenting the swap trading relationship between swap dealers or major swap participants and their counterparties. Accordingly, SEC has now proposed the requirements applicable to SBS entities.


Related Link: Federal Register Notice

Comment Due Date: April 16, 2019

Keywords: Americas, US, Banking, Securities, Security-based Swaps, Swap Participants, Dodd Frank Act, Risk Mitigation, Reporting, CFTC, SEC

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