SEC Goes After Arcane Bets
By Sarah N. Lynch and Jessica Holzer
October 14 (Wall Street Journal)
U.S. securities regulators, in their first move toward regulating the $615 trillion swaps market, unveiled a proposal Wednesday to rein in conflicts of interest in derivatives clearing and trading venues. The proposal by the Securities and Exchange Commission aims to prevent companies like big banks from wielding too much voting power in clearing and trading venues for security-based swap products such as credit-default swaps. It would impose voting caps on participants in those facilities and require clearinghouses and trading venues to place independent directors on their boards and other certain committees.
The proposal, which requires a majority vote by the SEC before it can be published for public comment, is similar to a proposal floated by the Commodity Futures Trading Commission earlier this month. A second vote is needed to implement it.
Both the SEC and CFTC won broad new powers to police the over-the-counter derivatives market under the Dodd-Frank law enacted in July.
That law aims to reduce risks in the broader market and shine more light on swaps, financial products that derive their value from an underlying asset such as a commodity or bond. Swaps are used by companies across the U.S. as a way to hedge against risks such as interest-rate or currency fluctuations, but also can be used by speculators seeking to profit from price movements. Under the law, the CFTC will regulate the bulk of the swaps market, including swaps tied to commodities, interest rates and currencies. The SEC will control security-based swap products such as equity swaps and some types of credit derivatives.
The SEC's governance proposal would give clearinghouses a choice between two plans.
The first one would prevent clearing members from individually owning or voting more than 20% of the voting interest in any security-based swap clearing venue and prohibit participants from collectively controlling 40% of the voting shares in the aggregate. It also would require 35% of the clearing board to consist of independent directors and require a majority of the nominating board to be independent as well.
The second plan, like the CFTC's, would instead let clearinghouses impose a 5% voting restriction across the board for each participant. In that case, the board of directors would need to have a majority of independent directors, and its nominating committee would be solely comprised of independent directors.
As for exchanges and other swap-trading venues, the rule would prevent participants or members from controlling 20% of the voting shares. Those venues would also need to have independent representation on their boards as well as nominating committees consisting solely of independent directors.
Additionally, the SEC proposed rules that require issuers of asset-backed securities to conduct reviews of the underlying assets backing the securities and to disclose the results of the reviews to investors.
The proposal, approved by a 4-1 vote, would implement part of the Dodd-Frank financial overhaul. It was opposed by SEC Commissioner Luis Aguilar, who argued it was too weak because it doesn't set any minimum standards for the review.
The asset-backed securities market, which has long supported a broad array of consumer lending, seized up during the financial crisis amid investor doubts about the quality of the assets and loans underpinning the securities.
The proposal doesn't mandate a certain level or type of review, but requires issuers to disclose the nature of the review. Issuers may contract third parties to perform the review.
Mr. Aguilar, in prepared remarks at the meeting, argued the proposal is an endorsement of the "anything goes" approach of asset-backed issuers that led to the financial crisis.
"Instead of specifying that a real due-diligence review be performed, the commission's proposal simply says an issuer must perform a review," he said. "It sets out no standards or expectations on the nature of the review."
The SEC's proposal asks the commission to consider mandating the level and type of review when it finalizes the rule. The SEC has opened a public-comment period on the proposal that ends Nov. 15.
SEC Chairman Mary Schapiro said that she is leaning toward supporting a minimum level of review and that she suspected the SEC will end up with a mandated level of review.
The SEC also approved a temporary rule the requires traders to retain records of all their outstanding trades conducted prior to the adoption of Dodd-Frank. That rule aims to get people ready for rules still being developed that will require traders to submit information to regulators or to special swap warehouses. The CFTC adopted a similar temporary rule earlier this month as well.
The SEC and CFTC aren't collecting the data yet because they haven't proposed final reporting rules. Those permanent rules will be unveiled at a later date.
For now, these temporary rules urge firms to retain certain kinds of records such as information to determine the value of the trade, the date and time of execution, the name of the clearinghouse if the swap was cleared, any changes made to the terms of the contract and details on its final confirmation.
The temporary rule would require certain counterparties to the trades to report information to regulators upon request.
October 14 (Wall Street Journal)
U.S. securities regulators, in their first move toward regulating the $615 trillion swaps market, unveiled a proposal Wednesday to rein in conflicts of interest in derivatives clearing and trading venues. The proposal by the Securities and Exchange Commission aims to prevent companies like big banks from wielding too much voting power in clearing and trading venues for security-based swap products such as credit-default swaps. It would impose voting caps on participants in those facilities and require clearinghouses and trading venues to place independent directors on their boards and other certain committees.
The proposal, which requires a majority vote by the SEC before it can be published for public comment, is similar to a proposal floated by the Commodity Futures Trading Commission earlier this month. A second vote is needed to implement it.
Both the SEC and CFTC won broad new powers to police the over-the-counter derivatives market under the Dodd-Frank law enacted in July.
That law aims to reduce risks in the broader market and shine more light on swaps, financial products that derive their value from an underlying asset such as a commodity or bond. Swaps are used by companies across the U.S. as a way to hedge against risks such as interest-rate or currency fluctuations, but also can be used by speculators seeking to profit from price movements. Under the law, the CFTC will regulate the bulk of the swaps market, including swaps tied to commodities, interest rates and currencies. The SEC will control security-based swap products such as equity swaps and some types of credit derivatives.
The SEC's governance proposal would give clearinghouses a choice between two plans.
The first one would prevent clearing members from individually owning or voting more than 20% of the voting interest in any security-based swap clearing venue and prohibit participants from collectively controlling 40% of the voting shares in the aggregate. It also would require 35% of the clearing board to consist of independent directors and require a majority of the nominating board to be independent as well.
The second plan, like the CFTC's, would instead let clearinghouses impose a 5% voting restriction across the board for each participant. In that case, the board of directors would need to have a majority of independent directors, and its nominating committee would be solely comprised of independent directors.
As for exchanges and other swap-trading venues, the rule would prevent participants or members from controlling 20% of the voting shares. Those venues would also need to have independent representation on their boards as well as nominating committees consisting solely of independent directors.
Additionally, the SEC proposed rules that require issuers of asset-backed securities to conduct reviews of the underlying assets backing the securities and to disclose the results of the reviews to investors.
The proposal, approved by a 4-1 vote, would implement part of the Dodd-Frank financial overhaul. It was opposed by SEC Commissioner Luis Aguilar, who argued it was too weak because it doesn't set any minimum standards for the review.
The asset-backed securities market, which has long supported a broad array of consumer lending, seized up during the financial crisis amid investor doubts about the quality of the assets and loans underpinning the securities.
The proposal doesn't mandate a certain level or type of review, but requires issuers to disclose the nature of the review. Issuers may contract third parties to perform the review.
Mr. Aguilar, in prepared remarks at the meeting, argued the proposal is an endorsement of the "anything goes" approach of asset-backed issuers that led to the financial crisis.
"Instead of specifying that a real due-diligence review be performed, the commission's proposal simply says an issuer must perform a review," he said. "It sets out no standards or expectations on the nature of the review."
The SEC's proposal asks the commission to consider mandating the level and type of review when it finalizes the rule. The SEC has opened a public-comment period on the proposal that ends Nov. 15.
SEC Chairman Mary Schapiro said that she is leaning toward supporting a minimum level of review and that she suspected the SEC will end up with a mandated level of review.
The SEC also approved a temporary rule the requires traders to retain records of all their outstanding trades conducted prior to the adoption of Dodd-Frank. That rule aims to get people ready for rules still being developed that will require traders to submit information to regulators or to special swap warehouses. The CFTC adopted a similar temporary rule earlier this month as well.
The SEC and CFTC aren't collecting the data yet because they haven't proposed final reporting rules. Those permanent rules will be unveiled at a later date.
For now, these temporary rules urge firms to retain certain kinds of records such as information to determine the value of the trade, the date and time of execution, the name of the clearinghouse if the swap was cleared, any changes made to the terms of the contract and details on its final confirmation.
The temporary rule would require certain counterparties to the trades to report information to regulators upon request.