SEC Chair on risk reduction, transparency and integrity in swaps market
Recent remarks to the International Swaps and Derivatives Association (ISDA) by Gary Gensler, Chair of the US Securities and Exchange Commission (SEC), provide an interesting overview of recent and forthcoming regulation in the securities-based swap market.
The bulk of the US swaps market falls under the aegis of the Commodity Futures Trading Commission (CFTC), which Gensler previously chaired and where he sought to usher in a new era in response to the 2008 financial crisis. Security-based swaps, however, are assigned to the SEC. “While we have adopted many reforms to the security-based swap market, we have work to do to further fulfill our obligations under Dodd-Frank and update rules for this marketplace. Thus, we are embarking on yet another ‘new era.’”
With the aim of reducing risk, in November 2021 security-based swap dealers and major security-based swap participants were required to register with the Commission for the first time. Several new and proposed reporting requirements seek to enhance transparency, both pre- and post-trade. Also in November, rules took effect mandating the reporting of security-based swap data to a repository, making it available to the SEC, and from February 2022 these repositories were also obliged to share data on individual transactions with the public. A proposal currently underway seeks to require public reporting of large security-based swap positions, while another proposal on pre-trade transparency would create a framework for the registration of security-based swap execution facilities (SEFs). This would harmonize with the SEF framework of the CFTC, which Gensler says saves users millions of dollars per day.
Gensler also looks at the intersection of cryptocurrencies and derivatives, affirming that most crypto tokens are considered investment contracts by the Supreme Court. “Make no mistake: If a swap is based upon a crypto asset that is a security, then that is a security-based swap. Thus, our rules apply to them,” he states. Finally, he signals increased SEC attention on the use of derivatives within structured and so-called complex products.
Market events have occasionally and unfortunately brought security-based swaps to the fore in recent decades. “I think it’s important to shine light on these markets before any future such tremors arise.”
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