Good Morning.
This is an open meeting of the U.S. Securities
and Exchange Commission on April 18, 2012.
Today the Commission will consider adopting
the first of a series of rules related to
the oversight of swaps and security-based
swaps under Title VII of the Dodd-Frank Act.
This is one of several rules required by Title
VII, which established a comprehensive framework
for regulating the over-the-counter swaps
markets.
The Act calls on the SEC to regulate those
products deemed to be security-based swaps
and the CFTC to regulate swaps.
Among other requirements, Title VII mandates
that dealers and major participants in this
market register and be subject to regulatory
oversight.
The law also subjects dealers and major participants
to capital, margin, business conduct and additional
requirements.
Title VII defined the terms “swap dealer,”
“security-based swap dealer,” “major
swap participant” and “major security-based
swap participant,” but the statute directed
the SEC and CFTC, jointly, to further define
those terms, in consultation with the Federal
Reserve Board.
It also required the agencies to define the
term “eligible contract participant.”
The final rules and interpretations we are
considering today are intended to satisfy
these directives.
After the SEC and CFTC issued our joint proposal
in 2010, we received hundreds of comments.
Additionally, SEC and CFTC commissioners and
staff met with many market participants, investors
and others, and held a public roundtable to
inform our approach to developing these definitions.
The feedback we have received has been helpful
in highlighting the many issues the definitions
raise, and in emphasizing the importance of
getting the definitions right.
The final rules we are considering today also
have benefited significantly from work done
by the staff of the Commission’s Division
of Risk, Strategy and Financial Innovation
-- which analyzed extensive information regarding
the market for single-name credit default
swaps.
Our economists played the central role in
this effort, closely collaborating with the
staff of the Division of Trading and Markets,
as well the Office of General Counsel.
Together, they identified concerns and issues
that impact, either directly or indirectly,
the potential costs and benefits of the rulemaking
and analyzed the likely economic consequences
of various approaches.
I’m pleased that the Commission and its
staff took the time necessary to analyze available
data and to make the analysis available to
the public.
In particular, I note that the data analysis
informed the de minimis thresholds, which
have been tailored to the specifics of the
products and the markets at issue, with a
goal of preserving key counterparty and market
protections, while promoting regulatory efficiency.
Our analysis of available data on credit default
swaps highlights the significant concentration
in the single-name credit default swap market,
the portion of the CDS market for which the
SEC is responsible.
We believe that both the $3 billion de minimis
threshold and the $8 billion phase-in level
for credit default swaps ensure that the vast
majority of notional dealing activity in this
market is subjected to the SEC’s Title VII
dealer regulatory regime, consistent with
the statutory de minimis exception.
For security-based swaps other than credit
default swaps, we were guided in part by data
that showed that the size of this market is
only a small fraction of the size of the CDS
market.
Consistent with this difference, we have set
the de minimis threshold for these security-based
swaps at $150 million and the phase-in level
at $400 million.
In establishing who is a security-based swap
dealer, Congress gave us the task of identifying
those entities that specifically engage in
dealing activity in this market.
In doing so, Congress did not intend for all,
or even most, market participants who merely
engage in security-based swap transactions
– such as mutual funds and pension funds
-- to be regulated as security-based swap
dealers.
Further, in addition to limiting the pool
to just dealers, Congress also sought to have
us regulate only those market participants
who engage in dealing activity above a de
minimis amount.
By following Congress’ mandate to capture
those engaged in dealing activity (even above
a certain threshold), we are able to extend
the protections of the Title VII dealer regulatory
regime not only to regulated dealers, but
also to their counterparties.
This gives us even further coverage over security-based
swap transactions in the market.
Additionally, although this is the first in
a series of final rules arising under Title
VII, I would like to point out that we are
still committed to issuing a plan that lays
out the way in which all the Title VII rules
will be implemented.
Further, we currently are working to propose
rules involving capital, margin, segregation,
recordkeeping, and reporting for security-based
swap dealers and major security-based swap
participants, as well as a proposed approach
to the international application of Title
VII.
In addition to the need for final rules regarding
the dealer and participant registration process,
we are very aware of the importance of providing
market participants with an implementation
roadmap and “rules of the road” for cross-border
issues before requiring dealer and major participant
registration.
Accordingly, today’s adoption will not trigger
any immediate obligation to register as a
security-based swap dealer or major security-based
swap participant.
Adopting the entity definitions is a foundational
step in the establishment of the new regime
to regulate trading in this significant market.
These rules clarify for market participants
whether their current activities will subject
them to comprehensive oversight in the coming
months.
Before I ask Robert Cook, Director of the
Division of Trading and Markets, to discuss
the Division’s recommendations, I would
like to express my gratitude to the CFTC staff,
Commissioners, and Chairman Gensler, for all
the effort they have put into these rules.
The CFTC continues to be a collaborative partner
in this process.
I also would like to thank the SEC staff for
their efforts in bringing these recommendations
before the Commission.
They have worked many, many long hours analyzing
comments, discussing issues with the CFTC
and the public, weighing alternative approaches
and developing the final recommendations,
and keeping the Commission closely apprised
of the development of these recommendations.
You have once again done an extraordinary
job.
In particular, I would like to thank Robert,
as well as Brian Bussey, Joshua Kans, Richard
Grant, Richard Gabbert, Gregg Berman, and
Nathaniel Stankard from the Division of Trading
and Markets for all of their work on this
rulemaking.
Thanks as well to Craig Lewis, Jennifer Marietta-Westberg,
Adam Yonce, Gopa Biswas, and Matt Kozora from
the Division of Risk, Strategy, and Financial
Innovation;
Mark Cahn, Meridith Mitchell, Kevin Zambrowicz,
Paula Jenson, Janice Mitnick, and Robert Bagnall
from the Office of the General Counsel, as
well as Hope Jarkowski, formerly of the General
Counsel’s Office and now counsel to Commissioner
Paredes;
Amy Starr and Andrew Schoeffler from the Division
of Corporation Finance;
Jouky Chang, Jeffrey Cohan and Rachel Mincin
from the Office of the Chief Accountant; and
Stephen Packs and Edward Rubenstein, from
the Division of Investment Management.
Finally, I would like to thank the Commissioners
and all of our counsels, especially Cristie
March in my office, for their work and comments
on this rulemaking.
I’d also like to give a special thanks to
Commissioner Dan Gallagher.
As many of you know, Dan was a valued member
of the staff of the Division of Trading and
Markets before coming back to the SEC as a
Commissioner.
As such, the perspective and approach to working
through issues, that Dan has brought as a
former staff member, and to this rulemaking
in particular, are most welcome.
Now I’ll turn the meeting over to Robert
Cook to hear more about the Division’s recommendations.
