The first in a series of articles about swap-dealer registration and trade reporting, Vox Regulatory Specialist, Laura Kehoe, sets the stage with an overview of registration criteria and the timeline for financial institutions.
The Securities and Exchange Commission (SEC) has adopted new rules and rule amendments to register as a security-based swap dealer (SBSD) under the Dodd-Frank Act. These rules establish a framework for the regulation of margin, capital, segregation, recordkeeping and reporting, and business conduct. The SEC’s action follows previous Commodity Futures Trading Commission (CFTC) rulemaking, which set similar requirements for swap dealers and major swap participants. It is expected that swap dealers will leverage their implementation of the CFTC rules as a reference point when addressing the SEC rules.
The SEC’s finalization of the SBSD requirements implemented one of the last remaining aspects of the Dodd-Frank Act. The requirements impact all three lines of defense, requiring firms to develop and maintain vigorous compliance programs for their security-based swaps activities. Firms are required to access their current gap analysis and create compliance workstreams for required enhancement activities to ensure compliance by the October 6, 2021 registration compliance date.
Many investment firms are behind in the registration process because other concerns have taken priority amid the COVID-19 crisis. But the process is challenging and time-consuming due to the complexity of the requirements — even for entities already registered with the CFTC as swap dealers or with the SEC as broker-dealers.
Critical Dates for Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants
How Far Along Are Firms in the SBSD Registration Process?
Firms seeking to become SBSDs have initiated the registration effort by creating project governance frameworks and planning and analyzing the requirements.
For the planning and analysis phase, investment firms have organized workstreams by rule area. Each workstream is responsible for assessing the gaps between the firm’s existing compliance program and the SEC’s SBSD requirements and defining a path forward. The next step is implementation and validation, with some amount of post-registration work likely to be necessary.
While each workstream will require significant time and effort, firms are focusing on the following criteria:
Supervision: The SBSD supervision requirements are more prescriptive than the swap dealer supervision requirements, particularly regarding communication and transaction surveillance and documentation. However, the most significant difference between the SEC and CFTC requirements is the scope of associated persons (APs) that the supervision program will have to cover. While the CFTC generally limits the AP definition to front office personnel, the SEC takes a broader view, capturing anyone who “effects or is involved in effecting” security-based swaps
Operations: Investment firms will have to adapt existing swap dealer processes and systems to comply with SBSD requirements. The methods and procedures they use for daily marks, portfolio reconciliations, collateral management and segregation, recordkeeping, and trade reporting must be extended to security-based swap products and counterparties. Further complicating matters for non-US firms, the SEC has not finalized its substituted compliance determinations, except for Germany. The SEC also applies its rules to security-based swaps arranged, negotiated, or executed by US staff, even if the trade is booked to the non-US firm’s head office.
Capital and Margin: Nonbank investment firms will also have to comply with the SEC’s capital and margin requirements. Compliance will require internal model validation and regulatory approval, and detailed operational processes to calculate and exchange collateral and monitor capital levels.
Firms that have lagged in the SBSD registration process are not alone. With seven months left until the October 6 deadline, it is critical to accelerate your registration efforts. At Vox, we regularly help financial institutions to manage the complexities of complying with regulatory change. It is vital that you dedicate experienced and capable resources to the registration planning process as soon as possible to ensure timely registration as a SBSD.