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SEC Looks to Restart Swaps Regulation Effort, Harmonise Rules with the CFTC


The US Securities and Exchange Commission (SEC) last week announced its intentions to implement much-anticipated rules for the regulation of security-based swap execution facilities, in a move that would bring it in alignment with the Commodity Futures Trading Commission (CFTC).


In one of his first major speeches since taking over as SEC chairman in April, Gary Gensler said he wanted to see the SEC harmonise its derivatives rules with similar laws already in place at the CFTC, which would spell stricter oversight to the derivatives market overall, as directed by the Dodd-Frank Act.

The CFTC is the principle body responsible for overseeing derivative regulation, but the SEC has lagged in its efforts to write required rules, despite similar rules being proposed way back in 2011. Dodd-Frank came into effect in 2010. ‘I’ve asked staff to recommend how we can best harmonize security-based SEFs rules with those that have been in place under the CFTC for nine years and have been effective,’ Gensler said. ‘To accomplish this, I would envision that we would put out another notice-and-comment rulemaking.’ He added: ‘I believe aligning the SEC’s regime with the CFTC’s could garner many of the same benefits — bringing together buyers and sellers with transparent, pre-trade pricing and lowering risk in the marketplace. Together, the rules going live this fall will increase transparency and reduce risk in the derivatives market. I believe they’re long overdue’The SEC is likely to take particular aim at security-based swap execution facilities (SEFs), including reporting, clearing, SEFs trading, and substituted compliance.

When it comes to position sizing and limits, meanwhile, Gensler highlighted the recent collapse of family office Archegos Capital, in which a number of banks enabled Archegos to run large levered positions in a handful of single stock names using total return swaps.He said SEC staff have been directed to consider new rules under SEA Section 10B. Requirements that are likely to be imposed on such firms include including counterparty protections, capital and margin requirements, internal risk management, supervision, recordkeeping and reporting procedures.

SBSDs are required to register with the SEC in November 2021, with Gensler predicting that some 40-50 firms are likely to register in the US alone. Other European countries are expected to align themselves with the SEC as part of a substituted compliance with the SEC’s capital and margin requirements, including the UK, France and Germany.As always, AQMetrics will be keeping a close eye on any developments in the coming months.


You can also watch our recent 18f-4 webinar, where we explain how buy side firms can gear up for the new derivative rules.