[ by Howard Haykin ] The SEC adopted final rules that establish procedures for its review of certain clearing agency actions.  The rules, as mandated by Dodd-Frank, called for a new regulatory framework for trading in OTC derivatives, including swap agreements. The rules detail how clearing agencies will provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. The information is intended to aid the SEC in determining whether such security-based swaps are required to be cleared. "This is an important step in laying the groundwork for the SEC's ability to determine which security-based swap contracts are required to be cleared.  This step advances a major goal of the Dodd-Frank Act and the commitment of the G-20 countries to reduce systemic risk by increasing the clearing of over-the-counter derivatives." --  Mary Schapiro, SEC Chairman. The SEC also adopted rules requiring clearing agencies that are designated as "systemically important" to submit advance notice of changes to their rules, procedures, or operations if the changes could materially affect the nature or level of risk at those clearing agencies. Most of the final rules will become effective 60 days after the date of publication in the Federal Register. SEC FACT SHEET. Title VII of Dodd-Frank mandates that security-based swap transactions must be cleared through a clearing agency if they are of a type that the SEC determines must be cleared - unless an exception applies. Essentially, the clearing agency will act as a middleman between the parties to a transaction, and assumes the risk should there be a default.  When structured and operated appropriately, such clearing agencies can provide benefits such as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.  Through clearing agencies, regulators also are more easily able to monitor transactions, including prices and positions taken by traders. Currently, SRO's, including clearing agencies, must file with the SEC copies of any proposed rule or any proposed change in, addition to, or deletion from the rules of the SRO.  Unless a clearing agency has rules that permit it to clear a security-based swap, it would need to obtain SEC approval of a proposed rule change in accordance with Section 19(b) of the Exchange Act in order to commence clearing an applicable security-based swap. The Dodd-Frank Act also requires the SEC to adopt rules for setting out the way in which clearing agencies must submit information to the SEC so that the SEC could determine whether such security-based swap is subject to mandatory clearing. Final Rule Re: Security-Based Swap Submissions. Under the final rule, a clearing agency will be required to file information with the SEC regarding any security-based swap - or any group, category, type, or class of security-based swaps - that a clearing agency plans to accept for clearing.  These "security-based swap submissions" will be filed electronically with the SEC using the existing Electronic Form 19b-4 Filing System and Form 19b-4. The final rule, which amends Rules 19b-4 and Form 19b-4 under the Exchange Act, also describes the information that must accompany each submission so that the SEC will be able to determine whether the security-based swap should be subject to mandatory clearing.  This information includes quantitative and qualitative information to assist the SEC in the assessment of the factors set forth under Dodd-Frank Act which the SEC is required to take into account in its review of the security-based swap submission. The final rule also specifies how the clearing agency must notify its members about the submissions it makes, and requires clearing agencies to post their security-based swap submissions on their public websites within two business days. Final Rule Re: Advance Notice by "Systemically Important" Clearing Agencies. The SEC also adopted rules defining and describing when a designated "systemically important" clearing agency must provide advance notice to the SEC before it makes certain changes to its rules, procedures, or operations.  As with the final rules re: security-based swap submissions - e.g., "advance notices" will need to be filed electronically with the SEC using the existing Electronic Form 19b-4 Filing System and Form 19b-4 and must be posted on the clearing agency's public website within 2 business days. The final rule will generally require an advance notice when:

• The proposed change would affect the risk management functions performed by the clearing agency that are related to systemic risk
• The proposed change could affect the clearing agency's ability to continue to perform its core clearance and settlement functions

Changes that could require advance notice may include, but are not limited to, changes that materially affect participant and product eligibility, risk management, daily or intraday settlement procedures, default procedures, system safeguards, governance, or financial resources of the designated clearing agency. Additional Final Rules. In addition to what's described above, the final rules also:

• Establish the procedure by which the SEC may stay the mandatory clearing requirement at the request of a counterparty to the security-based swap or on the SEC's own initiative
• Seek to prevent evasion of the clearing requirement by clarifying that clearing needs to occur through a central counterparty
• Make form and rule changes to reflect new deadlines under Dodd-Frank for proposed rule changes by SRO's.

What's Next? Most of these new rules become effective 60 days after the date of publication in the Federal Register. But 12/10/12 will be the effective date for the amendments to Form 19b-4 and the requirement to submit security-based swap submissions and advance notices electronically using the Electronic Form 19b-4 Filing System and Form 19b-4.  Until such date, clearing agencies will be required to make these filings by sending them to a dedicated electronic mailbox established by the SEC. For further details, go to:  [SEC PR 12-124, 6/28/12] and [SEC Final Rule Release 34-67286].