Wednesday, April 18, 2012

SEC Adopts Key Definitions for Security-Based Swaps

The SEC today unanimously adopted a rule defining key terms for security-based swaps. The Commission has issued a Fact Sheet on the new rule, but the final rule itself has not yet been posted to the SEC’s website. The rule was adopted under provisions contained in the Dodd-Frank Act. Said Chairman Mary L. Schapiro: “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.”

“Security-Based Swap Dealer” is defined to include a de minimis exception. The discussion at today's Commission meeting highlighted the usefulness of analytical data in fixing the de minimis exception level. In general, the de minimis rule exempts entities with dealing activity in security-based swaps based on a notional dollar amount: $3 billion over the prior 12 months for credit default swaps (CDS) dealing transactions in CDS that are security-based swaps; $150 million for other security-based swaps.

The de minimis exception is to be phased in over time: for credit default swaps, those entities with $8 billion or more in CDS dealing transactions over the prior 12 months must register; for other security-based swaps, the phase-in amount is $400 million. The phase-in period will end on a date after the SEC finalizes a report on the security-based swap market, unless the Commission modifies the de minimis thresholds or specifies a time period by rule. The term “Security-Based Swap Dealer” does not include persons who enter security-based swaps for their own account “not as part of a regular business.”

Other key terms defined in the rule include “Major Security-Based Swap Participant,” “Substantial Position,” “Hedging or Mitigating Commercial Risk,” “Substantial Counterparty Exposure,” “Financial Entity,” and “Highly Leveraged.” Also, exemptive relief from Exchange Act Section 6(l) will expire when the term “eligible contract participant” becomes effective.

The final rule is effective 60 days after publication in the Federal Register. Dealers and major participants must register on the dates to be fixed in final rules for the registration of these entities.