Friday, July 01, 2011

SEC Provides More Guidance and Exemptions for Security-Based Swaps under Dodd-Frank

The SEC has provided additional guidance on which federal securities laws will apply to security-based swaps starting July 16, 2011, which is the effective date of Title VII of the Dodd-Frank Act, which created a new regulatory framework for OTC derivatives. While starting July 16 security-based swaps are defined as “securities” subject to existing federal securities laws, the SEC granted temporary relief clarifying that a substantial number of the requirements of the Exchange Act applicable to securities will not apply to security-based swaps when the revised definition of security goes into effect on July 16. But, importantly, prohibitions on fraud and manipulation will continue to apply to security-based swaps after that date. Essentially, the temporary relief maintains the existing legal framework for security-based swaps under the Exchange Act until the Commission adopts new rules for these transactions, according to Robert Cook, Director of the Division orading and Markets.

Further, to enhance legal certainty for market participants, the Commission also provided temporary relief from provisions of U.S. securities laws that allow the voiding of contracts made in violation of those laws.
In addition, the Commission approved an interim final rule providing exemptions from the Securities Act, Trust Indenture Act and other provisions of the federal securities laws to allow certain security-based swaps to continue to trade and be cleared as they have pre-Dodd-Frank. That interim relief will extend until the Commission adopts rules further defining “security-based swap” and “eligible contract participant.”

The purpose of the exemptions is to allow market participants to continue to enter into those security-based swaps that under current law are defined as security-based swap agreements as they do today without concern that such security-based swap transactions may not comply with the provisions of the Securities Act, the registration provisions of the Exchange Act or the indenture provisions of the Trust Indenture Act. Thus, the interim final rules are intended to minimize disruptions and costs to the security-based swap markets that could occur on the effective date

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