SEC Proposes New Recordkeeping Requirements For SBSDs and MSBSPs

by Shannon Allen

The Securities and Exchange Commission (“SEC”), per the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), pursuant to the Securities Exchange Act of 1934 (“Exchange Act”), proposes new recordkeeping, reporting, and notification requirements for security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”), an additional capital charge provision, and technical amendments to the broker-dealer recordkeeping, reporting, and notification requirements.

The Dodd-Frank Act created a new regulatory agenda for over-the-counter (“OTC”) derivatives markets and was enacted, among other reasons, to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things:

1. Providing for the registration and regulation of SBSDs and MSBSPs;
2. Imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions;
3. Creating recordkeeping and real-time reporting regimes; and
4. Enhancing the SEC’s rulemaking and enforcement authorities with respect to all registered entities and intermediaries subject to SEC oversight.

The SEC’s proposed rules are modeled on broker-dealer Rules because SBSDs and MSBSPs are anticipated to operate in financial markets and effect financial transactions that are comparable to the financial markets in which broker-dealers operate and the financial transactions that broker-dealers effect.  The SEC’s proposal also includes the addition of a capital charge provision to create net capital requirements for stand-alone SBSDs. 

The SEC seeks comment on, including empirical data in support of:

• The general approach that would require SBSDs and MSBSPs to comply with recordkeeping, reporting, notification, and securities count rules modeled on the broker-dealer recordkeeping, reporting, notification, and securities count rules.
• Whether the entities that register as nonbank SBSDs will engage in a securities business with respect to security-based swaps that is comparable to the securities business conducted by broker-dealers.  If not, how will the securities activities of nonbank SBSDs differ from the securities activities of broker-dealers?
• Whether the entities that register as bank SBSDs will engage in a securities business with respect to security-based swaps that is comparable to the securities business conducted by broker-dealers. If not, how will the securities activities of bank SBSDs will differ from the securities activities of broker-dealers?
• How many broker-dealers will register as SBSDs? What types of broker-dealers will register as SBSDs and what types of activities will these broker-dealers currently engage in?
• How many banks will register as SBSDs? What types of banks will register as SBSDs and what types of activities these banks currently engage in?
• How many entities will register as MSBSPs? What types of entities?
• How many broker-dealers will register as MSBSPs? How many banks will register as MSBSPs?
• Are there requirements in these proposed rules applicable to broker-dealer SBSDs and broker-dealer MSBSPs but currently not applicable to stand-alone SBSDs or stand-alone MSBSPs that should be applicable to standalone SBSDs or stand-alone MSBSPs, or vice versa?
• Are there requirements in these proposed rules applicable to broker-dealer SBSDs and broker-dealer MSBSPs but currently not applicable to bank SBSDs or bank MSBSPs that should be applicable to bank SBSDs or bank MSBSPs, or vice versa?
• Are there provisions in the rules that the U.S. Commodities Futures Trading Commission (“CFTC”) adopted governing recordkeeping and reporting obligations of swap dealers and major swap participants that the SEC should consider incorporating into the recordkeeping and reporting requirements for SBSDs and MSBSPs? If so, please identify the specific provision and explain why.
• Identify any operational compliance challenges with respect to the proposed recordkeeping requirements raised by attributing guaranteed security-based swap positions to an MSBSP.

Interested parties are invited to submit comments (referencing File Number S7-05-14) by July 1, 2014 by any (choose only one) of the following methods:

• Electronically:  Use the SEC’s Internet comment form (http://www.sec.gov/rules/proposed.shtml);
• Email: Send an email to rule-comments@sec.gov. Please include File Number S7-05-14 on the subject line;
• Federal eRulemaking Portal: (http://www.regulations.gov). Follow the instructions for submitting comments; OR
• Paper Comments: Send paper comments to Kevin M. O'Neill, Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.