SEC Regulation SBSR Update · 2019. 3. 13. · Comparison with CFTC Requirements The SEC believes that its SBS reporting rules are “largely consistent” with the CFTCs. The rules,

Davis Polk & Wardwell LLP

SEC Regulation SBSR Update

Presented by

Zachary J. Zweihorn

Counsel, Davis Polk & Wardwell LLP

June 12, 2017

FTF SECURITIES OPERATIONS CONFERENCE, BOSTON, MASSACHUSETTS

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Agenda

Background on Reg SBSR

Dodd-Frank and Regulatory Goals

SBS Data Repository Obligations

SBS Reporting Requirements

What SBS Must be Reported

Who Must Report each SBS

When Must Reports be Submitted

What Data Must be Reported

What Information is Disseminated

Cross-Border Considerations

Compliance Timing

1

Comparison with CFTC Requirements

The SEC believes that its SBS reporting rules are

“largely consistent” with the CFTCs.

The rules, however, diverge in significant ways.

In this presentation, areas where there are SEC

requirements that are significantly different from CFTC

requirements will be noted in red.

2

Background on Reg SBSR

Background on Reg SBSR

As part of the Title VII derivatives reform provisions of

the Dodd-Frank Act, Congress mandated a new reporting

and transparency structure around security-based swaps.

While highly technical, regulators view these rules as a

critical component of Title VII.

The SEC has indicated two primary goals:

Regulatory Oversight. Assist regulatory authorities to access and analyze the data

from secure, central locations, thereby putting them in a better position to monitor for

potential market abuse and risks to financial stability.

Marketplace Transparency. Reduce the potential information advantage that

dealers may have over counterparties by making pricing information more widely

available.

4

What is an SBS Data Repository?

Under the Exchange Act, a person is an SBSDR if it:

collects and maintains information or records with respect to transactions or positions

in, or the terms and conditions of, security-based swaps …

entered into by third parties …

for the purpose of providing a centralized recordkeeping facility for security-based

swaps.

5

SBS Data Repository Obligations

Designate a CCO

Submit to SEC examination

Accept SBS data reporting

Confirm accuracy of reported data

Maintain data in required form for required

period

Provide the SEC with direct electronic

access

Publicly disseminate required

information on a non-fee basis, without

usage restrictions

Establish automated systems for

analyzing data

Maintain privacy of transaction information

not subject to dissemination

Provide information to certain other

regulators, subject to certain confidentiality

and SEC notification requirements

Not engage in restraints of trade or burden

competition

Charge only fair/reasonable fees

Minimize conflicts of interest

Provide fair and open access

Have transparent governance with fair

representation

Adopt dispute resolution procedures

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SBSDRs are subject to SEC registration and have various obligations:

SBS Reporting and Dissemination

Generally each SBS must be reported—including an SBS resulting from an

allocation, termination, novation or assignment of another SBS.

Reporting hierarchy* based on status of “sides”—including guarantors:

8

SBS Reporting Requirements Who Must Report SBS Transactions?

SBS Transaction / Parties Reporting Party

Platform-executed SBS that will to be submitted to clearing Platform

Transaction where Clearing Agency is direct counterparty Registered clearing agency

Registered SBS Dealers on both sides Parties may select

A registered SBS Dealer is on one side Registered SBS Dealer

Registered Major SBS Participants on both sides Parties may select

A registered Major SBS Participant is on one side Registered Major SBS Participant

Both sides are U.S. persons not subject to registration Parties select

* The hierarchy for reporting cross-border SBS is addressed below.

Reports of initial execution or life cycle events must be submitted within 24

hours.

If the deadline is not a business day, it shifts to the next business day.

The CFTC currently requires that reports be submitted as soon as technologically

possible but not later than 15 minutes after execution, subject to delays for block

trades.

The 24-hour deadline is expected to be an introductory “interim phase.”

No block-trade exemption, yet.

SEC may introduce if/when the reporting deadline is compressed.

9

SBS Reporting Requirements When to Report?

Each SBS Data Repository must adopt procedures detailing:

How it will receive data

Specific reportable data fields

Acceptable data formats, connectivity and protocols

SBSDRs will be required to use unique identification codes, either assigned by

an SEC-recognized standards body or by the SBSDR for:

The SEC has recognized the Global Legal Entity Identifier System as the

issuer of UICs for entities, and therefore requires that its LEIs be used.

10

SBS Reporting Requirements How to Report?

Counterparty ID

Product ID

Transaction ID

Broker ID

Branch ID

Trading Desk ID

Trader ID

Platform ID

Ultimate Parent ID*

Primary trade information includes:

Product ID (or the relevant product information, if no Product ID is assigned)

Execution time (to the second)

Price and currency

Notional amount

Whether the trade is inter-dealer (between two registered SBS dealers)

Whether the SBS will be submitted to clearing

Any flags required by the SBSDR necessary to indicate why the price may not be

representative of the market

E.g., inter-affiliate transaction, transaction from netting/compression, late reports, package

trades potentially involving other assets

11

SBS Reporting Requirements What Gets Reported: Primary Trade Information

Secondary trade information includes:

Counterparty ID or Execution Agent ID (as applicable) of each counterparty

As applicable, Branch ID, Broker ID, Execution Agent ID, Trader ID, Trading Desk ID

of the direct counterparty on the reporting side

Platform ID (if applicable)

To the extent not reported as primary information, the terms of any fixed or floating

payments and any contingencies

Any other terms not otherwise reported necessary to determine the market value of

the transaction

If the SBS will be cleared, the name of the clearing agency to which the SBS will be

submitted

12

SBS Reporting Requirements What Gets Reported: Secondary Trade Information

Secondary trade information includes (cont.):

If the SBS will not be cleared:

the title and date of each relevant agreement incorporated into the SBS (e.g., master

agreement, collateral agreement, margin agreement).

whether a counterparty is relying on the end-user exemption from clearing for non-

financial entities using the SBS to hedge commercial risk.

a description of the settlement terms (cash/physical, how settlement value determined.)

If the transaction resulted from an allocation, assignment, termination, or novation,

the Transaction ID of the original transaction.

13

SBS Reporting Requirements What Gets Reported: Secondary Trade Information (cont.)

Dodd-Frank requires reporting of “Pre-Enactment” and “Transitional” SBS:

Pre-Enactment SBS. SBS that were open as of July 21, 2010

Transitional SBS. All SBS that were entered into between July 21, 2010 and the

compliance date for trade-by-trade reporting

All primary and secondary trade information must be reported once an SBSDR

accepts reports for that asset class, to the extent that such information is

available.

Historical swap information will not be publicly disseminated.

14

SBS Reporting Requirements What Gets Reported: Historical Trade Information

The reporting side must report any “life cycle event” that would change the

primary or secondary trade information of a previously reported swap (including

a historical swap).

Exception: The clearing agency must report the acceptance of an SBS for clearing

and the related termination of the original SBS.

Reportable life cycle events could include:

Change of counterparty resulting from allocations, assignments, or novations

Change to the reference assets, e.g., due to a merger of the issuer or stock split

Amendments or terminations

Life cycle events must be reported within 24 hours, though corrections of

reporting errors must be reported “promptly” after discovery.

Daily market values/valuation data need not be reported.

No daily “state data” reporting option

15

SBS Reporting Requirements What Gets Reported: Life Cycle Events

All primary trade information must be disseminated by SBSDRs “immediately”

upon receipt of a report of an SBS transaction, life cycle event, or correction.

SBSRs may not charge fees for receipt of data, or place restrictions on use.

Exceptions from dissemination:

Embargo Rule. No one may disseminate information about an SBS execution,

other than to the counterparties themselves or post-trade processors, until the

information has been sent to the SBSDR.

16

Public Dissemination of SBS Data

Secondary trade information

Counterparty IDs

Historical SBS

For uncleared SBS, “any information

disclosing the business transactions

and market positions of any person”

Non-mandatory report information

Clearing transactions

Allocations of SBS that were reported

as a bunched order

No inter-affiliate exception

Cross-Border Considerations

For SEC SBS purposes, “U.S. person” includes:

A natural person resident in the United States

A partnership, corporation, trust, investment vehicle, or other legal person established

under the laws of the United States or having its principal place of business in the

United States

Investment funds may or may not be U.S. persons based on same test as for other

legal entities, without considering their level of ownership by U.S. persons.

An account (whether discretionary or non-discretionary) of a U.S. person

An estate of a decedent who was a resident of the United States at the time of death

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Cross-Border Considerations U.S. Person Status

19

Cross-Border Considerations Reporting and Dissemination of Cross-Border SBS

Under the SEC’s cross-border rules, SBS may be subject to reporting and/or

dissemination even when there is limited involvement of U.S. persons:

SBS Transaction / Parties Reportable? Subject to

Dissemination?

Any direct counterparty or guarantor is a U.S. person Yes Yes

Accepted for clearing by a U.S.-based clearing agency (even if

between non-U.S. counterparties) Yes Yes

Executed through a platform having its principal place of business in

the U.S. (even if between non-U.S. counterparties) Yes Yes

Effected by or through a registered broker-dealer (even if between

non-U.S. counterparties) Yes Yes

Executed (i) as part of a non-U.S. person’s unregistered SBS dealing

activity and (ii) is arranged, negotiated, or executed by U.S.-based

personnel (even if with a non-U.S. counterparty) Yes Yes

Entered into by a non-U.S. person that is registered as a SBS dealer

or Major SBS Participant as direct or indirect counterparty, with

another non-U.S. person Yes

No, unless

otherwise subject

to dissemination

20

Cross-Border Considerations Reporting Hierarchy for Cross-Border SBS

Reporting hierarchy for cross-border SBS between unregistered persons:

SBS Transaction / Parties Reporting Parties

Between two non-U.S. unregistered SBS dealers engaged in ANE

transactions Parties select

Between non-U.S. SBS dealer engaged in ANE and a non-U.S.

person not engaged in ANE

Non-U.S. SBS dealer

engaged in ANE

Between a non-U.S. SBS dealer engaged in ANE and a U.S. person Non-U.S. SBS dealer

engaged in ANE

Neither side is a U.S. person or a non-U.S. SBS dealer engaged in

ANE, but transaction is effected through a registered broker-dealer Registered broker-dealer

Foreign entities may be subject to local SBS reporting rules, and may request

that the SEC recognize substituted compliance.

Obtaining substituted compliance would require, among other things:

The SEC, by order, to find that the foreign reporting rules are comparable in terms of

data elements, timing of reporting, and dissemination.

The SEC to have “direct electronic access” to the foreign trade repository.

The SEC and the foreign regulator to enter into an MOU relating to supervisory and

enforcement cooperation.

21

Cross-Border Considerations Substituted Compliance

SBS Reporting Compliance Timing

The SEC has set forth a compliance schedule, although the actual dates are

not yet known.

23

SBS Reporting Compliance Timing

Compliance Stage What Becomes Effective Effective Date

Compliance Date 1

New SBS in the relevant asset

class must be reported by the

reporting party if the SBS is

subject to reporting

The first Monday that is the later of (i) six

months after the date that an SBSDR can

accept transaction reports for the

relevant asset class registers with the

SEC, and (ii) one month after the

compliance date for SBS entity

registration

Compliance Date 2

SBSDRs that accept SBS reports

must publicly disseminate

required information

The first Monday that is three months

after Compliance Date 1 for that asset

class

Compliance Date 3 Historical swaps must be reported By or before two months after

Compliance Date 2

Compliance Date 1 is one month after the compliance date for SBS dealer

registration.*

The compliance date for SBS dealer registration is six months after the date of

publication of SBS dealer capital and margin rules.

The date of publication of the SBS dealer capital and margin rules is … ???

24

SBS Reporting Compliance Timing (cont.)

Publication of

SBS Dealer

Capital /

Margin Rules

Compliance

Date for SBS

Dealer

Registration

SBS

Reporting

Compliance

Date 1

SBS

Reporting

Compliance

Date 2

SBS

Reporting

Compliance

Date 3

6 months 1 month 3 months 3 months

* Assumes swap dealer registration compliance date is more than five months later than the date an SBSDR registers.

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Zachary J. Zweihorn COUNSEL

Washington DC Office

202 962 7136 tel

202 962 7095 fax

[email protected]

Mr. Zweihorn is counsel in Davis Polk’s Financial Institutions Group and the Trading and Markets practice. He advises on a wide range of securities regulatory, compliance and transactional matters, with particular focus on the regulation of broker-dealers and other active securities and financial market participants. His clients include major international banks, broker-dealers, securities exchanges and other financial institutions.

PROFESSIONAL HISTORY

Counsel, 2015-present

Associate, 2007-2015

Washington DC office, 2010-present

New York office, 2007-2010

Foreign Law Clerk, Hon. Asher Dan Grunis, Supreme Court of Israel, Jan. – May 2007

ADMISSIONS

District of Columbia

State of New York

EDUCATION

B.A., Queens College, 2004

Phi Beta Kappa

summa cum laude

J.D., Cornell Law School, 2007

Order of the Coif

magna cum laude

Editor, Cornell Law Review