SEC Adopts Rules for the Registration and Regulation of Security-Based Swap Execution Facilities

Following the launch of a corresponding consultation in April 2022, the U.S. Securities and Exchange Commission (SEC) has published its final rule as regards a new regulatory regime for the registration and conduct of security-based swap execution facilities (SBSEFs). The aim of the new rule, which is mandated under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), is to increase transparency and oversight in the swap market following the 2008/2009 financial crisis.
Overall, the final rule will implement the proposed provisions as is with some targeted minor modifications in response to the feedback received to its consultation. The key provisions of the new rule are briefly summarized below; for detailed, comprehensive information, please refer to the enclosed legal document.
(1) Registration requirement: The new rule will require SBSEFs to register with the Commission via new form SBSEF. It is worth noting in this context that SBSEFs that only offer a platform for trading security-based swaps (SBS) will not have to be additionally registered as an exchange. Also, registered SBS clearing agencies that „only“ engage in certain matching and execution functions will also be exempt from the SFSEF registration requirement.
(2) Trade execution obligations: The new rule implements new trade execution rules for SBS which require the use of mandatory execution methods such as an order book or, in conjunction with it, a Request for Quotation (RFQ) system. Also, the new rule stipulates that an SBS transaction should be executed on an SBS exchange or SBSEF after the SEC’s determination that the SBS requires clearing or 30 days after a Made-Available-to-Trade (MAT) determination submission or certification for that SBS is approved or certified. Certain SBS are also exempt from the trade execution requirement such as SBS transactions within a package transaction involving bond issuance in a primary market or SBS transactions between eligible affiliate counterparties.
(3) Implementation of core principles set out in Section 3D(d) of the Exchange Act: To provide sufficient safeguards for swap participants and oversight for the regulator, SBSEFs will be required to implement the core principles of the Exchange Act which include a wide array of requirements, ranging from recordkeeping obligations for all key activities performed by the SBSEF, to the creation of policies and procedures to prevent and mitigate conflicts of interest, to the maintenance of adequate financial resources to ensure compliance with the new rules and cover costs for a one year operating period – at the least. Other important core principles include the requirement to adopt policies and procedures for system integrity, including the creation of backup facilities and disaster recovery plans, the adherence to compliance and enforcement obligations, or the prevention of fraud by only allowing SBS to be traded that are „not readily susceptible to manipulation“.
(4) Oversight requirements for SBS transactions: The new rule stipulates that SBSEFs are responsible for actively overseeing trading to prevent manipulation, price distortion, and any disruptions in the delivery or settlement process. They must also regularly and promptly disclose essential trading information like prices, trading volume, and other relevant data regarding SBS transactions. This information must be made publicly available via the „Daily Market Data Report“ on their websites.
(5) Appointment of a chief compliance officer (CCO) and adoption of corresponding reporting procedures: In an effort to ensure that an SBSEF complies with all the requirements implemented via the new regulatory regime, it must appoint a CCO to oversee compliance. The CCO will also be responsible for submitting an annual compliance report to the SEC and to address and resolve material conflicts of interest „that may arise in consultation with the governing board or the senior officers of the SBSEF“.