The SEC voted unanimously to propose joint rules with the CFTC that would further define a series of terms related to the security-based swaps market, including “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant” and “eligible contract participant.”

The rules seek to implement provisions of the Dodd-Frank Reform Act which, among other things, established a comprehensive framework for regulating the OTC swaps market.  The SEC is seeking public comment on the proposed rules for a period of 60 days following their publication in the Federal Register.

    SEC's Fact Sheet - Background.   Dodd-Frank established a comprehensive framework for regulating the OTC swaps markets and, in particular, divided regulatory authority over swaps between the SEC and the CFTC. 

• SEC has authority over “security-based swaps.”  Broadly defined as swaps based on:  (i) a single security;  or (ii) a loan;  or (iii) a narrow-based group or index of securities;  or (iv) events relating to a single issuer or issuers of securities in a narrow-based security index.
• CFTC has primary regulatory authority over all other swaps.
• CFTC and SEC share authority over “mixed swaps.”  Security-based swaps that also have a commodity component.

Among other things, Dodd-Frank authorizes the SEC to provide for the registration and regulation of security-based swap dealers and major security-based swap participants.  Dealers and major participants would be subject to several statutory requirements, including those related to capital, margin and business conduct.

In consultation with the Board of Governors of the Federal Reserve, SEC and CFTC also must jointly define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant” and “eligible contract participant.”
The Proposal

    SEC's Fact Sheet - Proposed Rules for New Definitions.   The SEC and the CFTC in part would add new rules under the Securities Exchange Act of 1934.   in connection with the definitions of “security-based swap dealer” and “major security-based swap participant.” 

In defining a “Security-Based Swap Dealer,” the SEC intends to interpret the definition put forth in Dodd-Frank in a manner that builds on the dealer-trader distinction that already is used to identify dealing activity involving other types of securities, while taking into account the special attributes of security-based swap markets.

In determining a De Minimis Exemption from that definition, the proposed rule would require that a person meet all of the following conditions to be exempt from the dealer definition on the basis of de minimis activity:

• The aggregate effective notional amount, measured on a gross basis, of the security-based swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $100 million.
• The aggregate effective notional amount of such security-based swaps with “special entities” (as defined in Exchange Act Section 15F(h)(2)(C) to include certain governmental and other entities) over the prior 12 months must not exceed $25 million.
• The person must not enter into security-based swaps as a dealer with more than 15 counterparties, other than security-based swap dealers, over the prior 12 months.
• The person must not enter into more than 20 security-based swaps as a dealer over the prior 12 months.

To continue reading - for, among other things, definitions and terms/conditions for a "Major Security-Based Swap Participant," "Substantial Position," "Hedging or Mitigating Commercial Risk," click onto:   [SEC Release 10-237, 12/3]