Swaps Are First Up in Reform Rulemaking Process

As promised, the SEC hasn’t wasted any time with the financial regulatory reform rulemaking process as it tackles derivatives – a big factor in the 2008-2009 financial crisis. It’s probably no surprise that the first concept release and first roundtable focus on the regulation and clearing of mixed swaps.

Less than one month after President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC and the Commodity Futures Trading Commission will hold a public roundtable tomorrow from 9 a.m.-noon ET to discuss issues related to governance and conflicts of interest in the clearing and listing of swaps and security-based swaps.

The roundtable will have two panel sessions: one on types of conflicts involving swaps and another on methods for remediating those conflicts. Members of the public are invited to submit their views on the issue. [Click here to see the agenda and information for dialing into the roundtable via telephone.]

Just last week the SEC issued its first concept release related to the Dodd-Frank Act. That release focuses on “Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act.” [Read the full release and make public comments here.]

The reason for the release is that under the Dodd-Frank Act the agency along with the CFTC and the Board of Governors of the Federal Reserve System are charged with defining certain key terms related to swaps. Those terms are:

• Swap
• Security-based swap
• Swap dealer
• Security-based swap dealer
• Major swap participant
• Major security-based swap dealer
• Eligible contract participant
• Security-based swap agreement

Both agencies will accept comments for 30 days after the release is printed in the Federal Register, which apparently hasn’t happened yet since no actual date was included.

By the way, one of the first public comments on the SEC Web site was from a Charles Wilcoxson who gives no affiliation. His definition for security swap? “Security swaps are insurance and as such should fall under regulations that cover insurance instruments. Much of the 2008 financial problem seems to have been caused by companies that sold naked insurance (swaps) coverage. When faced with defaults, these insuring companies could not cover the claims.”

- Gary Larkin