The Securities and Exchange Commission recently issued its final rule on security based swap reporting, Regulation SBSR, meant to discharge a statutory mandate imposed by Congress in the Dodd-Frank Act of 2010.
As the mere mention of the year 2010 may remind you, though, this regulation has been a long time a-coming. The SEC first proposed a Reg SBSR in November 2010. It re-posed it, thus re-opening the comment period, on May 1, 2013.
The final rule is a long and dense read, as is fitting after such a wait. Here are some initial impressions.
Four Exemptions
It assigns reporting obligations for security based swaps that don’t fall into any of four exempted categories: clearing transactions; security-based transactions executed on a platform that will be submitted to clearing; transactions where there is no U.S. person on either side; or transactions where there is no registered security-based swap dealer or registered major security-based swap participant on either side and there is a U.S. person on only one side.
A bit more on the first two of those exemptions: a clearing transaction is one in which a registered clearing agency is a direct counterparty. A platform is a national securities exchange or a swap execution facility. [I’ll say a bit more about a “U.S. person” for purposes of the final two exemptions below.]
If a security based swap is executed on a platform as so defined and if it will be submitted to clearing, “the platform on which the transaction was executed shall report to a registered security-based swap depository the information required.”
Blizzards and Bunched Orders
The SEC has made some changes in the final rule vis-à-vis the form in which it was proposed in 2013. Commenters suggested, for example, that the rule should incorporate a 24-hour delay for the reporting of block trades, which could be “reduced or refined after the [SEC] gathers additional information” about the market conditions. The final rule in essence incorporates this suggestion, a T + 24 approach.
Further, if the transaction occurs on the day before a non-business day, (weekend or holiday) the reporting requirement of the final rule applies to the same time on the next day that is a business day. This ensures that swap counterparties will have “at least an entire business day to hedge their positions, if they so desire.” But be warned, blizzards constitute no excuse! The final rule is explicit that if New York is shut down by a blizzard on a weekday that is not a general holiday … the clock continues to tick, the T+24 deadline is unaffected.
One section of the final reg discusses reporting requirements for bunched orders, that is, involving swaps executed by an asset manager on behalf of multiple clients. Is the Dodd-Frank purpose of the reporting requirement satisfied by release of information about the order itself, without the allocation information?
The final rule answers this point “yes.” The SEC believes that the goal of transparency regarding allocations is accomplished anyway; because it is requiring that the reporting side for a bunched swap order report the transaction ID of the bunched order execution. This report “will allow the [SEC] and other relevant authorities to link a report of a bunched order execution to the smaller security-based swaps that result from the allocation of the bunched order execution.”
Indeed, the SEC goes further than simply failing to require disclosure of the allocation information with the report on the bunched swap order. It actually prohibits such an overly transparent report.
The MFA in a comment had expressed concern for the anonymity of investment managers. The SEC approvingly quotes that comment in footnote 576 of its publication of the new final rule. “Counterparties are often aware of an investment manager’s standard fund allocation methodology and therefore, reporting transactions at the allocated level will make evident an allocation scheme that other participants can easily associate with a particular investment manager.”
U.S. Guarantors of non-US Parties
Above I noted that whether a transaction must be reported depends in part on whether a U.S. person is involved on one or both sides. There has been some back-and-forth about the indirect involvement of U.S. persons, especially about the extension of the reporting requirement to a circumstance in which a U.S. person acts as a guarantor of a security-based swap.
The SIFMA/FIA/Roundtable comment letter, for example, contended that a guarantee is too tenuous a nexus to justify the application of Regulation SBSR. ESMA suggested that a threshold value for the guarantee be added.
On this point, though, the Final Rule stuck with the broader mandate of the May 2013 proposal. The SEC explains that such an “indirect counterparty” is “economically equivalent” to a direct counterparty.