US Securities and Exchange Commission Proposes Risk Mitigation Requirements for Uncleared Security-Based Swaps

The Securities and Exchange Commission has proposed rules that would establish risk mitigation requirements with respect to a registered security-based swap dealer’s or major security-based swap participant’s (collectively, SBS Entities’) portfolio of uncleared security-based swaps.  The proposed rules would establish requirements for SBS Entities in respect of security-based swap portfolio reconciliation, portfolio compression and trading relationship documentation, and will become relevant when the SEC commences requiring registration of SBS Entities.  The proposal continues the agency’s ongoing efforts to implement its security-based swap regulations pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act and is intended to harmonize the SEC’s requirements with those of the Commodity Futures Trading Commission, which adopted similar risk mitigation requirements for uncleared swaps in 2012. 

The proposal would define “portfolio reconciliation” to mean the process by which two counterparties to one or more security-based swaps: (i) exchange the terms of all security-based swaps in a security-based swap portfolio; (ii) exchange each counterparty’s valuation of all outstanding security-based swaps as of the close of business on the immediately preceding business day; and (iii) resolve any discrepancy in valuation or materials terms (i.e. terms that are required to be reported to a registered security-based swap data repository).  

Under the proposal, an SBS Entity would be required to engage in portfolio reconciliation for a security-based swap portfolio with another SBS Entity no less frequently than:
 

• Each business day for each portfolio that includes 500 or more security-based swaps;
• Weekly for each portfolio that contains between 50 and 500 security-based swaps;
• Quarterly for each portfolio that contains no more than 50 security-based swaps at any point during the calendar quarter.

For security-based swap portfolios with a counterparty that is not an SBS Entity, an SBS Entity would be required to engage in portfolio reconciliation no less frequently than (i) quarterly for each portfolio that includes more than 100 security-based swaps at any point during the calendar quarter; or (ii) annually for each portfolio that includes no more than 100 security-based swaps at any point during the calendar quarter.

The proposal would also impose requirements for resolving discrepancies in material terms and transaction values.  Additionally, an SBS Entity must notify the SEC of any security-based swap valuation dispute in excess of $20,000,000 if it has not been resolved within either 3 or 5 business days, depending on whether or not the counterparty is another SBS Entity.
Further, the proposed rule would establish portfolio compression requirements for security-based swap portfolios.  For security-based swap portfolios between two SBS Entities, an SBS Entity would be required to adopt and follow policies and procedures relating to bilateral and multilateral compression exercises, where appropriate. 

Similar requirements would apply to security-based swap portfolios between an SBS Entity and a non-SBS Entity counterparty, to the extent requested by the counterparty.

The proposal would also require that an SBS Entity establish and enforce policies and procedures in respect of ensuring that the SBS entity carry out written security-based swap trading relationship documentation with each counterparty prior to or contemporaneously with executing any security-based swap.  Such policies and procedures would need to include all terms governing the trading relationship and credit support arrangements, along with agreed upon methods for valuing each security-based swap.

Comments on the proposal must be received by April 16, 2019.

View the press release and accompanying fact sheet. 

View the proposal.

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