Proposed Regulation SB SEF: Some Highlights
As part of its ongoing implementation of the Dodd-Frank Act, the SEC has proposed new Regulation SB SEF under the Securities Exchange Act of 1934. The regulation would create a registration framework for security-based swap execution facilities (SB SEFs); establish rules to ensure compliance with the Dodd-Frank Act’s Core Principles; and implement a process for a SB SEF to submit to the Commission proposed changes to the SB SEF’s rules. The Commission also proposed an interpretation of the definition of “security based swap execution facility.”
As published by the SEC, the proposing release and text of Regulation SB SEF consists of 464 pages. It does not include a table of contents. To assist in the navigation of the proposal, page references to the release as published by the SEC are included. Knowledge Mosaic has also provided a table of contents (with jump links) to the SEC release. It can be viewed by clicking on the link at the end of this article and then clicking on the bookmark icon in the left margin.
The Definition of a Security-Based Swap Execution Facility.
Rather than proposing a prescribed configuration for SB SEFs, the Commission proposes baseline principles interpreting the definition of “SB SEF” which an entity must meet in order to be registered. The key requirement for a registered SB SEF is that it provide for multiple-participant to multiple-participant interaction (p. 21). While a buy-side participant could limit to whom a request for quote is sent, the SB SEF would not be able to limit the number of liquidity providing participants from whom a buy-side participant could request a quote (p. 22). A SB SEF would also need to provide basic functionality that allows any participant on the SB SEF the ability to make and display executable bids or offers accessible to all other participants on the SB SEF, if the participant chooses to do so (p. 25). In addition, each SB SEF would be able to offer only one type of trading method (p. 27).
Core Principle 2 (Compliance with Rules) and Core Principle 6 (Financial Integrity of Transactions).
The Dodd-Frank Act does not define the categories of market participants that may have access to trading on a registered SB SEF or the terms of such access. To ensure that SB SEFs grant access to their markets in a manner consistent with the Core Principles the Commission proposes Rules 809 and 811(b).
Proposed Rule 809 would set forth the categories of persons permitted to have direct access to trading on a SB SEF as a participant and also the terms and conditions that the SB SEF would need to adopt for granting such access. Proposed Rule 811(b) would elaborate on the standards for providing impartial access.
The purpose of the proposed rules is to ensure that access to SB SEFs is granted in a manner that strikes an appropriate balance between the statutory requirements of impartial access (Core Principle 2) on the one hand and financial integrity of transactions (Core Principle 6), on the other (p. 49). Additionally, as interpreted by the SEC, Core Principle 2 addresses the mundane (trading hours) to the esoteric (when will a SB swap be considered to be made available for trading). Its discussion includes trading procedures (p. 87); block trades (p. 95); disciplinary rules (p. 102); and surveillance (p. 104).
Core Principle 14 – Designation of Chief Compliance Officer.
The proposed rule requires the appointment by the SEF’s full board of an independent Chief Compliance Officer (CCO) (p. 167). The full board must also vote on the CCO’s compensation. The CCO’s numerous responsibilities include approving and signing an annual report which discusses the SEF’s compliance with the Core Principles, the SEF’s enforcement and compliance policies and procedures, and the results of its surveillance activities (p. 172).
Comments should be submitted on or before April 4, 2011. View the proposing release and text here.