US Securities and Exchange Commission - VALIC

SEC Adopts Risk Mitigation Techniques for Uncleared Security-Based Swaps

SEC - Mitigation TechniquesWashington D.C., Dec. 18, 2019 — The Securities and Exchange Commission today voted to adopt rules requiring the application of risk mitigation techniques to portfolios of uncleared security-based swaps.  New Rules 15Fi-3, 15Fi-4, and 15Fi-5 establish requirements for registered security-based swap dealers and major security-based swap participants (“SBS Entities”) to:

  • Periodically reconcile outstanding security-based swaps with counterparties,
  • Engage in certain forms of portfolio compression exercises, as appropriate, and
  • Execute written trading relationship documentation with each of their counterparties prior to, or contemporaneously with, executing a security-based swap transaction.

These rules were adopted pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The Commission also adopted amendments to its existing cross-border rule to provide a means to request substituted compliance with respect to the portfolio reconciliation, compression, and trading relationship documentation requirements.  Finally, the Commission amended its recently-adopted recordkeeping, reporting, and notification rules to incorporate records relating to the new risk mitigation requirements.

Jay Clayton, SEC Chairman
Jay Clayton, SEC Chairman

“Ensuring that counterparties agree in writing on the terms of their security-based swap transactions, and that such transactions are periodically reconciled and compressed, goes to the heart of the Dodd-Frank Title VII regulatory regime,” said Chairman Jay Clayton.  “These rules are designed to guide and drive security-based swap entities to accurately and effectively manage their market and credit risks throughout the life of a security-based swap transaction, including by mitigating the risk that a disagreement, ambiguity or omission will affect performance.” 

“I again commend Commissioner Peirce for her continued leadership in our efforts to stand up the Dodd-Frank Title VII regulatory regime in coordination with our colleagues at the CFTC,” added Chairman Clayton. “I also want to thank our colleagues at the SEC, including in the Division of Trading and Markets and the Division of Economic Risk and Analysis, for bringing their considerable experience to this effort.  CFTC Chairman Tarbert, former CFTC Chairman Giancarlo, Commissioner Quintenz, and CFTC staff also have my sincere thanks for engaging with us on these important rules throughout the process.  I am pleased that the end result is a set of requirements that are substantially harmonized for dual SEC- and CFTC-regulated entities.”

“These rules represent an important piece of our regulatory framework for SBS Entities, as they will help ensure that the firms that play a central role in our security-based swap market are appropriately managing key risks associated with their activity in this market,” said Commissioner Hester Peirce.  “These rules codify prudent business practices that I expect most firms in our markets already follow, and, because they substantially track existing CFTC requirements, they should not impose unnecessary additional burdens on dually registered firms. I would like to thank the Commission staff in particular for their thoughtful engagement with the concerns of market participants and with our colleagues at the CFTC.”

In a separate action today, the Commission also adopted rules and guidance addressing the cross-border application of certain security-based swap requirements, which establish the date on which SBS Entities are required to register with the Commission.  Rules 15Fi-3 through 15Fi-5 complete the final set of substantive requirements applicable to those SBS Entities.