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SEC Adopts Final Security-Based Swap Trade Acknowledgment and Verification Rules
Practical Law Legal Update w-002-5728 (Approx. 3 pages)
SEC Adopts Final Security-Based Swap Trade Acknowledgment and Verification Rules
by Practical Law Finance
| Published on 09 Jun 2016 • USA (National/Federal) |
The SEC adopted final rules establishing timely and accurate trade acknowledgment and verification requirements for security-based swap entities that enter into SBS transactions.
On June 8, 2016, the SEC adopted final rules that establish timely and accurate trade acknowledgment and verification requirements for Security-Based Swap Entities that enter into security-based swap (SBS) transactions. The adopted rules include Rules 15Fi-1 and 15Fi-2 under the Securities Exchange Act of 1934 (Exchange Act).
SBS Entities include security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs). SBS Entities are required to register with the SEC and conform to SEC rules regarding timely and accurate confirmation, processing, netting, documentation, and valuation of all SBS.
New rule 15Fi-2 requires SBS entities to:
- Provide a trade acknowledgment disclosing all terms of each SBS transaction electronically to its counterparty promptly, and no later than the end of the first business day following the day of execution.
- Establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of a trade acknowledgement.
- Promptly verify or dispute with its counterparty the terms of a trade acknowledgment it receives.
The rules also contain exceptions:
- For certain transactions that are executed on an SBS execution facility (SBSEF) or a national securities exchange (a major SEC-registered securities exchange), or that are accepted for clearing by a clearing agency that clears SBS.
- From Exchange Act Rule 10b-10 for broker-dealers that are SBS entities and that satisfy trade acknowledgment and verification requirements in the final rules. Rule 10b-10 generally requires that broker-dealers effecting securities transactions on behalf of or with customers provide to their customers a written notification containing certain basic transaction terms.
The final rules also amend Rule 3a71-6 under the Exchange Act, providing a substituted compliance option for non-US entities to satisfy these requirements.
The rules are designed to:
- Promote the efficient and effective operation of the SBS market by ensuring more accurate and timely documentation of SBS transactions.
- Facilitate market participants' management of their SBS-related risk.
- Help avoid a recurrence of documentation backlogs.
- Address concerns expressed by the Government Accountability Office regarding the documentation of credit derivatives.
- Reduce the risk that a court may have to supply contract terms upon which there was no previous agreement.
The final rules are effective on August 16, 2016.
However, only registered SBS Entities must comply with Final Rules 15Fi-1 and 15Fi-2. Since the SEC has yet to establish a compliance date for SBS entity registration rules, the compliance date for Final Rules 15Fi-1 and 15Fi-2 will be the same as the compliance date for SBS Entity registration rules and will be the latest of the following dates:
- 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 SBS Entities.
- The compliance date of final rules establishing recordkeeping and reporting requirements for SBS Entities.
- The compliance date of final rules establishing business conduct requirements under Exchange Act Sections 15F(h) and 15F(k).
- The compliance date for final rules establishing a process for a registered SBS Entity 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 SBS on the SBS Entity’s behalf.