Bloomberg News

Swaps Registrants Would Have to Vouch for Capability in SEC Rule

October 12, 2011

Oct. 13 (Bloomberg) -- Securities-based swap dealers and large swap participants would need to have senior officers certify their ability to participate in the $601 trillion market under registration rules proposed by the U.S. Securities and Exchange Commission.

SEC commissioners voted 3-1 yesterday to seek comment on a Dodd-Frank Act rule that calls on firms to certify operational and compliance capabilities and ensure trades aren’t conducted by people who are “statutorily disqualified.”

Dodd-Frank, the regulatory overhaul enacted last year, directed the SEC and Commodity Futures Trading Commission to write rules for derivatives markets after largely unregulated trades of credit-default swaps contributed to the financial crisis in 2008. JPMorgan Chase & Co., Bank of America Corp., Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. are the biggest U.S. derivatives traders, according to a second- quarter report from the Comptroller of the Currency.

“Registering the major market participants in the largely unregulated security-based swap markets is a critical step toward better protecting investors,” SEC Chairman Mary Schapiro said before the vote. Senior-official certifications “would provide assurance as to the registrant’s financial, operational, and compliance capabilities,” she said.

SEC Commissioner Troy Paredes opposed the proposal, calling the senior official provision a “novel and untested approach” that could leave regulators with “too much room for after-the- fact second guessing.”

“What it means to be capable in these respects is simply unknown,” Paredes, the commission’s sole Republican, said at the meeting. Firms that develop problems could be vulnerable to having the SEC decide later that the senior officer’s determination was wrong, he said.

‘Quite Simple’

The requirement isn’t “particularly complicated,” Commissioner Elisse Walter, a Democrat, said at the meeting.

“The goal is quite simple: A potential registrant must be able to reasonably conclude that it can conduct the business for which it seeks a license from the commission,” she said before the vote.

The registration proposal -- which will be open to a 60-day public comment period -- would allow firms already registered with the CFTC to fill out a simplified form to register with the SEC. It also sets up a conditional registration process for those uncertain about registering before the rest of the regulators’ swaps rules are adopted.

The SEC’s December proposal for defining security-based swap dealers and major swap participants is still awaiting final adoption.

Derivatives, including swaps, are financial instruments used to hedge risks or for speculation. They may be based on stocks, bonds, loans, currencies or commodities, or linked to specific events like changes in interest rates. The SEC will oversee derivatives based on securities; the CFTC is responsible for the rest of the markets.

--Editors: Gregory Mott, Maura Reynolds

To contact the reporter on this story: Jesse Hamilton in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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