On June 11, 2012, the SEC released a policy statement intended to describe its approach to security-based swap (SBS) rulemaking under Title VII of the Dodd-Frank Act. While the document does not estimate when the rules might be put into place, it addresses how the SEC intends to approach each category of SBS rules and the sequence in which they would take effect. Therefore, rules from different rule categories may become effective simultaneously.

The document does specify that the SEC intends to implement definitional and cross-border rules first. The statement also discusses the timing of the expiration of temporary relief that the SEC has granted to certain market participants from compliance with certain Title VII SBS rules. Some of the rules discussed in the release have already been the subject of final rulemaking but have not yet become effective, while others are still in the proposal or earlier stages.

Rules defining the terms "security-based swap," "security-based swap agreement" and "mixed swap," and rules defining the terms "security-based swap dealer" (SBSD) and "major security-based swap participant" (MSBSP) are to become effective first. These definitions provide the foundation for the remaining Title VII rules by providing guidance on what products constitute SBS and which participants constitute SBSDs and MSBSPs and are therefore subject to heightened regulatory oversight under Title VII. While the final rules defining the terms "security-based swap dealer" and "major security-based swap participant" have already been issued jointly by the SEC and the CFTC, the final rulemaking defining the other terms has not yet been issued.

Rules on the application of Dodd-Frank swaps rules to non-US jurisdictions, often referred to as rules on extraterritorial impact, referred to in the SEC release as cross-border rules, will also be included in the first set of rules to become effective. These rules will address the extent to which non-US SBS market participants will be subject to SBS rules under Title VII. This will allow the SEC time to take into account comments on its approach to cross-border issues before requiring compliance by participants in the US SBS market with the final rules arising under the Exchange Act that have cross-border implications.

After the definitional and cross-border rules have been adopted, the SEC proposes that all security-based swap data repositories (SBSDRs), that is, SDRs that accept data on SBS, should be required to register with the SEC. This would promote the development and use of SBSDRs and facilitate the reporting of SBS transaction data to enable the SEC to use the data reported to registered SDRs in its rulemaking and hasten the dissemination of the SBS transaction data to the public.

SBS that are subject to the mandatory clearing requirement of Title VII would be required to be cleared on the later of:

The SEC is considering phasing in compliance with rules covering:

(See Practice Note, Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Swaps and Derivatives: Swap Dealers and Major Swap Participants.)

The compliance dates would be based on the amount of time the SEC estimates SBSDs and MSBSPs would need to comply with the relevant rules. SBSDs and MSBSPs might need less time to comply with certain rules based on the level of required modification to current SBSD and MSBSP business practices.

The SEC previously proposed a method for prospective security-based swap exchange facilities (SBSEFs) to apply for temporary registration as an SBSEF to facilitate the start of organized SBS trading (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Requirements for Swap Exchanges and Clearinghouses Under Dodd-Frank: DCOs, DCMs, SEFs and More: Swap Exchanges: SEFs and DCMs). This temporary registration during the first phase-in period for the rules discussed above (see Definitional and Cross-border Rules) would allow the SEC time to review each SBSEF registration application in greater detail. Temporary SBSEF registration for each SBSEF would expire on the earlier of:

Section 3C(h) of the Exchange Act requires that SBS subject to the clearing requirements of the Exchange Act (added by Title VII) must be executed on an exchange or on an SBSEF registered with the SEC, subject to certain exceptions. The SEC expects this requirement will not become effective until all of the following have occurred:

The SEC has granted temporary relief to SBS market participants from compliance with certain provisions of the Securities Act, the Exchange Act and the Trust Indenture Act relating to SBS added by Title VII pending final rulemaking by the SEC on SBS under Title VII (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: SEC Security-based Swap Compliance Exemptions and Revised Schedule). The policy statement explains that much of this relief will expire as their associated final rules under Title VII become effective.

The SEC is accepting public comments on this policy statement until 60 days after it is published in the Federal Register.

For more information on other SEC rulemaking under Dodd-Frank, see Practice Notes, Summary of the Dodd-Frank Act: Swaps and Derivatives, Is Your Client a Swap Dealer or Major Swap Participant? Breakdown of Final Dodd-Frank Definitional Rulemaking and Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.