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Motives Questioned in SEC Reissue of Swap Rules

Motives Questioned in SEC Reissue of Swap Rules

As a sign of their importance (or lack thereof) at the SEC, proposals for rules on securities-based swaps haven’t moved an inch along the pathway to approval since 2014. However, financial regulators appear to be taking a renewed interest in derivative instruments, and this month the SEC sent the proposed rules back out for public comment.

The approval process actually began way back in 2012, when the SEC first proposed rules required under Dodd-Frank for brokers selling securities-based swaps. Specifically, the rules dealt with capital and margin requirements for swap participants and broker-dealers. The commission put forward additional rules for comment in 2013 and 2014, but its work stopped there.

The commission said in a news release it had received “numerous” responses to its original request for comment. In light of the four-year layoff, the SEC said another comment period was warranted to account for changes in the marketplace and regulatory environment. The refreshed proposals presented for comment include new questions and potential tweaks to the original language of the rules.

“Reopening the comment period is an important step forward in standing up the security-based swap regime,” said Jay Clayton, chairman of the SEC. “We strongly encourage interested persons to submit comments and data for the Commission to consider as the rulemaking process moves forward.”

But what makes now the right time to proceed after allowing the proposals to languish for so long?

One explanation could be the ongoing push for the SEC and U.S. Commodity Futures Trading Commission (CFTC) to get their rules in sync. The securities derivatives regulated by the SEC actually make up a small fraction of the swaps market. In reality, the CFTC oversees roughly 90 percent of all swaps. Meanwhile, the CFTC is simultaneously working to streamline its own swap rules. Harmonizing the CFTC and SEC rules makes obvious sense; among other things, it would simplify the regulatory structure.

Skeptics, however, might characterize the SEC’s move as the latest ploy by the presidential administration to peel away safeguards implemented in the wake of the Great Recession by the 2010 Dodd-Frank legislation. Kara Stein, a democratic SEC commissioner, said in a public statement that in sending revised rules out for comment, the SEC was engaging in a “shadow rulemaking” that skirts the normal rule adoption process. “The nature and extent of the proposed rule text changes,” she said, “appear to me to be more akin to a ‘re-proposal’ than simply the reopening of a comment period.”

That marks an important distinction, as Sintein pointed out, because a re-proposal would require an economic analysis showing “how these proposed changes would affect efficiency, competition, and capital formation.” In other words, it appears as though the commission might be attempting an end run to avoid releasing an analysis that could sink the proposal.

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