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Derivatives Issues: Margin Rules, Cross-Border Application,
ISDA Stay Protocol and SEC Rules
November 6, 2015 Presented By
Julian Hammar James Schwartz
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Agenda • Prudential Regulator final uncleared swaps margin rules • Cross-border application of margin rules • ISDA 2014 Resolution Stay Protocol • Status of SEC Rules for Security-Based Swap Dealers • SEC Registration Rules for SBSDs
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Background Regarding Margin • Margin is a significant economic issue that the swap market will need
to address in accordance with regulations that are just now being finalized.
• One of the criticisms of the swap market in the wake of the financial crisis was that it did not require parties to provide margin (that is, collateral) to secure their obligations to each other.
• In practice, in many cases before and (even more so) after the crisis, parties have provided collateral (“variation margin”) reflecting the current (“mark-to-market”) value of their obligations to each other.
• Dodd-Frank requires regulators to draft rules requiring margin for bilateral swaps that will not be cleared at a clearinghouse (cleared swaps, in contrast, are subject to margin requirements imposed by clearinghouses and their members).
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Background Regarding Margin • The regulators have drafted rules for swaps that draw heavily on
traditional margin practices in the futures market. • Most significantly, the regulations will require many parties (other
than commercial end-users) to provide initial margin, which is intended to account for potential changes in value during the time when a swap is in the process of being terminated.
• Initial margin, when required, will be segregated and not subject to rehypothecation or other use – and, as such, a significant new cost for swap dealers and other financial entities.
• It remains to be seen how the market will respond to the margin requirements, and the extent to which, at the margin (so to speak), products other than swaps (for example, futures) may increasingly be used in place of swaps.
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Prudential Regulator Final Uncleared Swaps Margin Rules • The Prudential Regulators (Federal Reserve Board, Office of the
Comptroller of the Currency, Federal Deposit Insurance Corporation, Farm Credit Administration and Federal Housing Finance Agency) recently finalized their margin rules for uncleared swaps (Final Rules) that were re-proposed last Fall (originally proposed in 2011) in order to take into account the framework published by the Basel Committee on Banking Supervision (BCBS) and IOSCO on September 2013.
• The Prudential Regulators also issued an interim-final rule to exclude from the requirements most uncleared swaps that swap entities (swap dealers, major swap participants, security-based swap dealers and major security-based swap participants) enter into with commercial end users and financial institutions with $10 billion or less in total assets, consistent with the requirements of the Business Risk Mitigation and Price Stabilization Act of 2015.
• The CFTC, which sets uncleared swaps margin rules for non-bank swap dealers, has not yet issued final rules -- expected by year end.
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Prudential Regulator Rules -- Overview
• In general, the Final Rules will: • Require swap entities, subject to a threshold below which initial
margin need not be collected, to bilaterally exchange “initial margin” with other swap entities and with a broad range of “financial end users” whose use of uncleared swaps meet a notional amount-based threshold (“material swaps exposure”), all such initial margin to be segregated generally with an third-party custodian (not affiliated with either counterparty) and not subject to rehypothecation or other use by the custodian;
• Require swap entities to exchange “variation margin” with swap entities and with a broad array of financial end users (without regard to the existence of material swaps exposure) without any threshold; and
• Permit the calculation of initial margin by means of either a model-based method or a table-based method.
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Prudential Regulator Rules -- Overview
• Final Rules provide some relief from the Re-Proposal in certain areas, as well as some harmonization with the BCBS-IOSCO framework, but nonetheless represent a significant regulatory burden on the OTC swaps market that did not exist before.
• By design, the rules create higher margin requirements for uncleared swaps than for cleared swaps (i.e., by requiring a 10-day close-out horizon to calculate initial margin for most uncleared swaps as opposed to 5-days for cleared swaps) in order to “incentivize” clearing – this is not a requirement of Dodd-Frank, which only requires regulators to issue rules to provide for margin for uncleared swaps.
• A separate Interim Final Rule implements the exemption for commercial end users (among others); Final Rule exempts “other counterparties.”
• Final Rules provide only limited relief from the Re-Proposal with respect to inter-affiliate uncleared swaps.
• Cross-border application is little changed from the Re-Proposal.
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Prudential Regulator Rules -- Scope • Under the Final Rule, a Swap Entity will not be required to collect or
post specified amounts of initial or variation margin on swaps with counterparties that are not Swap Entities or “financial end users” – such counterparties are described in the Final Rules as “Other Counterparties.”
• The Final Rule retains the “financial end user” definition used in the Re-Proposal (a list of list of enumerated financial market status types under various U.S. statutes and regulations including banks, broker-dealers, investment companies, insurance companies, commodity pools and ERISA plans) which was intended to provide greater clarity than the “financial entity” definition used in the statutory exemption from mandatory clearing in the Commodity Exchange Act (CEA).
• Expressly excluded from the financial end user definition are sovereign entities (central governments or an agency or department thereof) and multilateral development banks.
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Prudential Regulator Rules -- Scope • Swaps with entities that are not financial end users (e.g., foreign
sovereigns or multilateral development banks) are exempt from margin requirements under the Final Rule, except swap entities must collect margin (if any) from such entities as the swap entity determines is appropriate in its overall credit risk management of its exposure to the customer.
• Swap entities must also make this determination for entities that do not qualify for the exemption under the separate Interim Final Rule (e.g., a commercial end user that is not hedging or mitigating commercial risk), as well as with respect to initial margin for financial end users without material swaps exposure (who are not subject to the rule’s initial margin requirements).
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Interim Final Rule Exemption
• In addition, in order to implement the requirements of the Business Risk Mitigation and Price Stabilization Act of 2015, the separate Interim Final Rule provides that the requirements of the Final Rule will not apply where the counterparty would be eligible for:
• An exemption from mandatory clearing under Section 2(h)(7)(A) the CEA or Section 3C(g)(1) of the Securities Exchange Act of 1934 (Exchange Act) (i.e., a non-financial entity using the swap to hedge or mitigate commercial risk, certain small financial institutions and captive finance companies);
• An exemption under CEA Section 4(c)(1) for cooperative entities that would otherwise be subject to the requirement to clear; or
• The exemption for affiliates under CEA Section 2(h)(7)(D) or Exchange Act Section 3C(g)(4) (i.e., affiliates that act as an agent).
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Key Changes to the Re-Proposal • The Final Rules also make a number of key changes to the Re-
Proposal. These include: • Modification to the Material Swaps Exposure amount and Initial
Margin Threshold; • Revision of the Definition of Affiliate; • Expansion of eligible collateral for Initial and Variation Margin; • Modification for Eligible Master Netting Agreements; • Adoption of a limited Inter-Affiliate Exemption from Initial Margin;
and • Changes to the phased-in compliance schedule.
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Financial End Users with Material Swaps Exposure
• The threshold for determining whether a financial end user has “material swaps exposure” has been increased from $3 billion to $8 billion of average daily aggregate notional amount of swaps activity over a 3-month period (determined by reference to the swaps activity of the financial end user and its affiliate(s)), which is more closely aligned with the BCBS-IOSCO Framework.
• This change will reduce the number of entities from which swap entities must post and collect initial margin, which is required under the rules for swaps between swap entities and financial end users with material swaps exposure, and level the playing field between swap entities subject to U.S. rules and those subject to rules of foreign jurisdictions, such as the European Union and Japan, which have more closely followed the BCBS-IOSCO Framework.
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Financial End Users with Material Swaps Exposure
• Final rules also clarify that swaps that are eligible for the exemption under the Interim Final Rule do not count toward the threshold.
• In a new provision, the Final Rules clarifies the consequences of a change in a counterparty’s status:
• If a change would make the rules stricter, such as when a financial end user becomes a financial end user with material swaps exposure, the stricter rules would apply for new swaps entered into after the change.
• Where a change would make the rules less strict (such as when the exposure of a financial end user with material swaps exposure falls below the $8 billion threshold), the swap entity may comply with less strict requirements for all outstanding swaps. Accordingly, initial margin, which is not required for swaps with financial end users that do not have material swaps exposure, would no longer apply with respect to all swaps.
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Threshold and Minimum Transfer Amount
• Certain other amounts in addition to the material swaps exposure threshold have been modified from the Re-Proposal to take into account changed exchange rates that have occurred since the Re-Proposal was issued:
• The initial margin threshold amount (i.e., the amount under which initial margin need not be collected) has been reduced from $65 million in the Re-Proposal to $50 million in the Final Rules.
• In addition, the minimum transfer amount across initial and variation margin has been reduced from $650,000 to $500,000.
• Regulators intend to make adjustments to the rules to take into account changes in exchange rates on a periodic basis as warranted.
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Definition of Affiliate • The Final Rules provide for a definition of “affiliate” that is aligned
with established accounting standards rather than relying on the “control” test contained in the Re-Proposal.
• Re-Proposal contained a low level of control for affiliation to exist – only 25 percent (not 50 percent or more) of the ownership or control, directly or indirectly, of a class of voting securities or total equity.
• Final Rules provide that affiliation exits if a company consolidates the other (or both companies are consolidated with a third company) on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards.
• The change may make it easier for companies to determine whether, for example, a financial end user has “material swaps exposure” (which must be calculated to include the exposures of its affiliates).
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Eligible Collateral • The Final Rules also expand the types of eligible collateral for initial
and variation margin. • Initial margin is intended to secure potential future exposure -- that is,
adverse changes in value that may arise during the period of time when a swap or group of swaps is being closed out – and is in addition to variation margin, which corresponds to changes in mark-to-market value of a swap.
• Under the Final Rules, eligible collateral types for Initial Margin is generally consistent with the Re-Proposal. These include U.S. Treasuries, GSE securities, securities issued by BIS, ECB, IMF and MDBs, publicly traded debt (other than asset-backed securities), publicly traded equities in certain indices and gold, but not securities issued by the pledgor or its affiliate or banks and similar entities.
• In addition, the Final Rules permit redeemable securities in certain money market mutual funds that meet specific requirements.
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Eligible Collateral • Variation Margin may include major currencies (defined in the Rules)
in addition to U.S. dollars and the currency of settlement, while the Re-Proposal would not have permitted major currencies.
• Subject to an 8% cross-currency haircut if margin is denominated in a currency different from settlement currency.
• In addition, the Final Rules permit non-cash collateral eligible to be used for initial margin to serve as variation margin for swaps between a swap entity and a financial end user (but not for swaps between swap entities), while the Re-Proposal only permitted cash collateral for variation margin.
• This change may be welcomed by certain financial entities, such as insurance companies, that hold significant reserves of bonds and other securities and commented that the restriction to cash-only variation margin would reduce their investment returns.
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Eligible Master Netting Agreements (EMNAs)
• Relief also was provided from the Re-Proposal with respect to pre-compliance date and post-compliance date swaps subject to a single “eligible master netting agreement” (EMNA).
• For swaps subject to an EMNA, variation margin can be calculated on a net basis and risk offsets can be recognized within asset classes for calculating initial margin.
• Under the Re-Proposal, although the rules applied only to swaps entered into after the relevant compliance date, transactions subject to an EMNA applicable to pre-compliance date transactions would be subject to margin requirements for all swaps under the EMNA.
• Accordingly, counterparties would have to enter into a separate EMNA for new swaps, which received criticism from commenters who argued that this would reduce netting sets and thus increase systemic risk.
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EMNAs • The Final Rules permit counterparties to document pre- and post-
compliance date swaps as separate portfolios for netting purposes under the same EMNA covered by separate credit support annexes.
• Accordingly, netting portfolios that contain only uncleared swaps entered into before the applicable compliance date are not subject to the Final Rules.
• Also with regard to EMNAs, the definition of EMNA is amended to provide that impermissible “walk away” clauses do not include clauses that only suspend payment obligations when a counterparty defaults.
• EMNAs, as under the Re-Proposal, are subject to a requirement that a swap entity conduct sufficient legal review to conclude with a well-founded basis that among other things, the contract would be found legal, binding, and enforceable under the law of the relevant jurisdiction.
• Although unqualified legal opinions are not required, the legal review must be in writing.
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Inter-Affiliate Swaps Exemption • Re-Proposal did not contain an exemption from the margin
requirements for swaps between affiliates. • Under the Final Rules, the margin requirements generally apply to
swaps between a swap entity and its affiliates (unless otherwise exempt), except that:
• A swap entity is not required to post initial margin to an affiliated counterparty.
• The swap entity must calculate the amount of initial margin that would be required to be posted to an affiliate (that is a financial end user with material swaps exposure) and provide documentation of such amount on a daily basis.
• Initial margin must be collected from an affiliate that is a financial entity with material swaps exposure, but the threshold is $20 million (rather than the generally applicable $50 million threshold).
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Inter-Affiliate Swaps Exemption • No relief for variation margin: Variation margin must be posted to and
collected from financial end user affiliates by swap entities. • Initial margin in the form of non-cash collateral for swaps between a
swap entity and its affiliates may be held by a custodian that is an affiliate of the swap entity or by the swap entity itself (rather than an unaffiliated third party as required for uncleared swaps with non-affiliates).
• The Final Rule allows a covered swap entity to use a 5-day time horizon for modelling the initial margin requirement, rather than the generally applicable10-day horizon, for swaps that are required to be cleared but which are exempt because of a clearing exemption for inter-affiliate swaps.
• Note that if an affiliate of a swap entity is itself a swap entity, then both swap entities must collect margin, and thus there is no relief from the posting requirement.
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Phased-in Compliance • Final Rules adopts the delayed phase-in schedule announced by
BCBS/IOSCO in March 2015, which delays implementation of initial margin and variation margin requirements by nine months starting September 1, 2016.
• Phased-in implementation for initial margin depending upon swaps exposure of the swap entity and its affiliates and its counterparties and their affiliates starting from September 2016 (for entities with the largest exposure) through September 2020.
• Delayed-implementation schedule with regard to variation margin for swap entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives is less that $3 trillion for March, April and May 2016, until March 1, 2017.
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Cross-Border Application • All this would be complex enough if all regulators and market participants
had to think about was how the margin rules applied to U.S. market participants.
• As with other swaps regulations under Dodd-Frank, however, U.S. regulators also need to think about the cross-border application of their rules – that is, how the rules will apply to transactions involving parties organized or located outside of the United States.
• While there are still unanswered questions, and many complexities and nuances, the basic rule is that the U.S. regulators are taking the position that their rules will apply whenever a U.S. market participant is a party to a swap transaction.
• This sounds simple and commonsensical, but it leaves answered the question of whether, in the cross-border context, U.S. rules will trump non-U.S. rules and, if so, why?
• Example: swap between U.S. dealer’s New York office and German swap dealer’s Frankfurt office
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Cross-Border Application • Cross Border application of the Final Rules is largely unchanged from
the Re-Proposal. • The Final Rules, as under the Re-Proposal, exempt foreign swap
entities (but not their U.S. branches or agencies) with respect to the foreign non-cleared swaps from the margin requirements.
• Exemption is not available where the foreign counterparty is, or is guaranteed by, a U.S. entity, a U.S. branch or subsidiary of a foreign bank, or a foreign swap entity that is a subsidiary of a U.S. entity.
• Substituted compliance (i.e., compliance with non-U.S. rules rather than U.S. rules) may be available for a foreign bank, U.S. branch or a agency of a foreign bank, or an entity that is a foreign subsidiary of a depository institution, Edge Corporation or Agreement Corporation.
• However, substituted compliance would be available only if the Prudential Regulators have made a comparability determination for the jurisdiction the rules of which would apply to the uncleared swap.
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Cross-Border Application • Moreover, substituted compliance would not be available if the swap
is guaranteed by a U.S. entity. • For all swap entities (including U.S.), a swap entity will be deemed to
satisfy the initial margin posting requirement under the Final Rules if its posts the amount of initial margin that its counterparty is required to collect under non-U.S. rules, provided that the Prudential Regulators have made a substituted compliance determination with respect to those rules and the swap is not subject to a guarantee from a U.S. entity.
• Final Rules also provide relief in certain circumstances from the segregation requirements to foreign branches and subsidiaries of U.S. banks and Edge Corporations where inherent limitations in the legal or operational infrastructure in a foreign jurisdiction make it impracticable to segregate collateral.
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ISDA 2014 Resolution Stay Protocol • Protocol is contractual solution to questions relating to the cross-
border application of special resolution regimes • Protocol is intended to address issue of banks being “too big to fail”
and to give regulators time to facilitate an orderly resolution of a troubled bank
• Developed by a group of ISDA member institutions in coordination with the Financial Stability Board
• Fundamental concern is that close-out of derivatives book of a large institution could destabilize markets and make resolution of the institution difficult
• This is topical now because proposed regulations could be rolled out as early as this month that will apply to a broader segment of the market requirements similar to those contained in the Resolution Stay Protocol
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ISDA 2014 Resolution Stay Protocol • In the U.S., concerns are addressed by Title II of Dodd-Frank
(“Orderly Liquidation Authority”), which imposes a limited stay on termination rights against U.S. banks.
• There are similar provisions in other countries to likewise restrict termination rights against banks
• However, the cross-border application of such special resolution regimes is not wholly clear
•What if U.S. bank in resolution faces counterparty in another jurisdiction? Is counterparty bound by Dodd-Frank’s special resolution provisions? •Similarly, what if non-U.S. bank faces a counterparty in the U.S? Is U.S. counterparty bound by the bank’s home country resolution procedures?
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ISDA 2014 Resolution Stay Protocol • Under ISDA 2014 Resolution Stay Protocol, adhering parties opt into
accepting the special resolution regimes that may apply to their counterparties
• Such resolution regimes typically stay or override certain default rights that would otherwise arise when a bank enters into insolvency, resolution or similar proceedings
• In addition, adhering parties opt into contractual stays on certain cross-default rights that would otherwise apply in the context of insolvency proceedings and that are similar to some of the types of stays contained in certain statutory resolution regimes
• Scope of protocol is limited to ISDA Master Agreements and related credit enhancements – but that is not expected to be the case under regulations expected to be released soon
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ISDA 2014 Resolution Stay Protocol • The Protocol was intended to apply only to the 18 largest banks and their
affiliates
• 188 adhering parties, most of them affiliated with large banks • Became effective for adhering parties at the beginning of this year • Many market participants (e.g., fiduciaries such as asset managers) would
have potential legal issues if they voluntarily gave up or agreed to delays in exercising their termination rights
• Accordingly, regulators will likely impose the contents of the Protocol on
many market participants by regulation in the near future, by means of requiring banks to add similar provisions to their trading agreements
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ISDA 2014 Resolution Stay Protocol • When and how will provisions of the protocol be rolled out to the market
beyond the largest banks? • Regulations are expected to be proposed this year, and finalized next
year, which will require regulated entities to include in their contracts with non-regulated entities provisions similar to those contained in the protocol
• Such regulations have already been proposed in Germany and the UK • ISDA has stated that it expects to release a protocol this month to
facilitate compliance with the expected regulations • Protocol is expected to cover not only transactions subject to ISDAs but
also repo transactions and securities lending transactions • There will likely be two different forms of the protocol, one for regulated
entities and one for buy-side firms • Many questions about the scope of the expected regulations
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ISDA 2014 Resolution Stay Protocol • Section 1 – Opt-in to Special Resolution Regimes
• Provides generally that if one adhering party is subject to a special
resolution regime, then the other adhering party may exercise default rights under an ISDA Master Agreement or related credit support arrangement only to the extent it would be able to do so under such special resolution regime
• Also provides that transfers of ISDA Master Agreements and related credit support arrangements will be effective to the same extent as such a transfer would be effective under the relevant special resolution regime
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ISDA 2014 Resolution Stay Protocol • Section 1 – Opt-in to Special Resolution Regimes
• Contains similar provisions that may apply if
• an affiliate of an adhering party (not the adhering party itself) becomes subject to a special resolution regime or
• a credit support arrangement runs to the benefit of an affiliate of a party to an ISDA Master Agreement
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ISDA 2014 Resolution Stay Protocol • Definition of “Special Resolution Regime” includes
• identified resolution regimes of France, Germany, Japan,
Switzerland, the UK and the U.S. and
• “Protocol-eligible Regimes” •defined to include the resolution regimes of states that are members of the FSB (examples: Argentina, Russia and Saudi Arabia), but only if such resolution regimes incorporate certain protections for creditors
• no discrimination based on nationality, location or domicile of creditors or jurisdiction where they may be paid
• limitations on nature of stay that may restrict creditors’ rights
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ISDA 2014 Resolution Stay Protocol • Section 2 – Limitation on Exercise of Default Rights in U.S.
Insolvency Proceedings
• Restricts default rights that would otherwise arise if an affiliate of an adhering party, not the party itself, becomes subject to insolvency proceedings
• Intended to support a “single point of entry”-style resolution of a parent entity of a financial group, a resolution with only the top-tier parent company entering proceedings
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ISDA 2014 Resolution Stay Protocol
• Protocol distinguishes between affiliates that are credit enhancement providers and affiliates that are not (but are presumably Specified Entities for purposes of a related ISDA Master Agreement)
• The protocol overrides contractual rights somewhat more narrowly with respect to a default of a credit enhancement provider of a party to an ISDA Master Agreement than with respect to a default of a Specified Entity of a party to an ISDA Master Agreement
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Status of SEC Rules • Few SEC rules are currently both technically in effect and
operative • SEC seems to want to take a less piecemeal approach
than the CFTC has taken • There is a contingent nature to the effectiveness of many
rules • Many rules will go into effect when other rules are
finalized or other events occur • Generally, to date, those conditions have not been met
• Broad no-action relief extends to February 2017
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Status of SEC Rules • Among the SEC rules that have been proposed but not yet finalized
are the following: • Cross-border rules, including rules stating which substantive SEC
requirements would apply to which security-based swap transactions and which market participants
• Recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants
• Business conduct standards for security-based swap dealers and major security-based swap participants
• Margin rules for uncleared swaps • Applications by security-based swap dealers and major security-
based swap participants for statutorily disqualified associated persons to be involved in effecting security-based swaps
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Status of SEC Rules • Among the SEC rules that have been finalized are the
following: • Registration process for security-based swap dealers
and major security-based swap participants (most recent – released in August of this year)
• Certain cross-border rules, relating to, among other things, which security-based swap transactions need to be counted toward the SBSD registration thresholds
• Security–based swap data repository registration, duties and core principles
• Reporting and Dissemination of security-based swap information
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SEC Registration Rules for SBSDs • The SEC’s final rules for the registration of security-based swap
dealers (“SBSDs”) set out the formal requirements for SBSD registration
• The compliance date, when the SBSD registration requirement will
go into effect, will occur only after the occurrence of several events that, taken together, have not yet occurred, cannot occur for a minimum of six months, and seem relatively unlikely to occur until after significantly more than six months have passed
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SEC Registration Rules – Timing • Specifically, the compliance date will occur on the later of:
• six months after the date of publication in the Federal Register of a final rule release adopting rules establishing capital, margin and segregation requirements for SBSDs;
• the compliance date of final rules establishing recordkeeping and reporting requirements for SBSDs;
• the compliance date of final rules establishing business conduct requirements for SBSDs; or
• the compliance date for final rules establishing a process for a registered SBSD to make an application to the SEC to allow an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on the SBSD’s behalf.
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SEC Registration Rules – Timing • Moreover, market participants are not required to register
as SBSDs until after their security-based swap activity exceeds certain de minimis thresholds.
• For purposes of complying with registration requirements, entities engaging in security-based swaps activities are not required to begin calculating whether their activities meet or exceed such thresholds until two months prior to the compliance date of the Registration Rules.
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SEC Rules – Conditional Registration
• Similar to the CFTC’s rules for the registration of Swap Dealers, the SEC Registration Rules provide for an application for conditional registration
• An applicant will be conditionally registered if it timely completes and submits
• the primary application form applicable to it and • a certification form
• The SEC may deny or grant ongoing registration as a SBSD based on the applicant’s application.
• The SEC will grant ongoing registration if it finds that applicable requirements are satisfied, and may institute proceedings to determine whether ongoing registration should be denied.
• If information contained in an applicant’s registration materials becomes inaccurate, such applicant must correct such materials.
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SEC Registration -- Application Forms
• The Registration Rules provide that an applicant must file one of three primary forms as part of its application for registration.
• The forms are annexed to the Registration Rules and form part of the rulemaking. The three forms are:
• Form SBSE, for entities that are neither registered or registering with the SEC as a broker-dealer nor registered or registering with the CFTC as a swap dealer or major swap participant;
• Form SBSE-A, for entities that are not registered or registering with the SEC as a broker-dealer but that are registered or registering with the CFTC as a swap dealer or major swap participant; and
• Form SBSE-BD, for entities that are registered or registering with the SEC as a broker or dealer.
• The SEC’s decision to use three different primary application forms is intended to recognize that, if an applicant is registered with the SEC or the CFTC, the SEC can obtain access to certain information regarding such applicant.
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SEC Registration Rules – Certifications
• In addition to a primary application form, an applicant must file a Form SBSE-C, which, like the primary application forms, is annexed to the Registration Rules and forms part of the SEC’s rulemaking.
• Form SBSE-C contains two separate certifications, one by a senior officer of the applicant and the other by the applicant’s chief compliance officer or his or her designee.
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SEC Registration Rules – Certifications
• A senior officer of the applicant must certify that such officer has: • after due inquiry, reasonably determined that the applicant has developed and
implemented written policies and procedures reasonably designed to prevent violation of federal securities laws and the rules thereunder; and
• documented the process by which he or she reached such determination.
• The term “senior officer” includes only the most senior executives in an organization, such as an applicant’s chief executive officer, chief financial officer, chief legal officer, chief compliance officer, president, or other person at a similar level.
• The development of the written policies and procedures referenced in this certification will likely be among the most time-consuming of the tasks required to register as an SBSD.
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SEC Registration Rules – Certifications
• Further, the applicant must certify, by its chief compliance officer or his or her designee, that the applicant:
• neither knows, nor in the exercise of reasonable care should have known, that any associated person who effects or is involved in effecting security-based swaps on its behalf is subject to a statutory disqualification, unless otherwise specifically provided by SEC rule, regulation or order; and
• has performed background checks on all of its associated persons who are natural persons and who effect or are involved in effecting security-based swaps on its behalf.
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SEC Registration Rules – Certifications
• The chief compliance officer, or his or her designee, must review and sign the questionnaire or application for employment executed by each associated person who is a natural person and who effects or is involved in effecting security based swaps on behalf of such applicant.
• Such questionnaire or application must serve as a basis for a background check of the associated person to verify that such person is not subject to statutory disqualification.
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SEC Registration – Associated Persons
• With respect to non-natural persons, when an entity files an application to register as an SBSD, such entity may permit a non-natural person that is associated with such entity that is subject to statutory disqualification to effect or be involved in effecting security-based swaps on its behalf, provided that
• the statutory disqualification(s) occurred prior to the compliance date of the Registration Rules, and
• the entity identifies each such associated person on the applicable application form.
• When the SEC issued its final Registration Rules, it also voted to publish in the Federal Register proposed rules that would permit a SBSD to make an application to permit a statutorily disqualified person (including a natural person) to effect or be involved in effecting security-based swaps.
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Questions? Julian E. Hammar [email protected] (202) 887-1679 James E. Schwartz [email protected] (212) 336-4327
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Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life sciences companies. We’ve been included on The American Lawyer’s A-List for 10 straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our lawyers are committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us stronger. This is MoFo. Visit us at www.mofo.com. © 2015 Morrison & Foerster LLP. All rights reserved. For more updates, follow Thinkingcapmarkets, our Twitter feed: www.twitter.com/Thinkingcapmkts.
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