Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on February 2, 2011.
Today, we will consider a proposal that would help define a security-based swap execution facility (SEF). We also will consider proposed rules that would establish the registration requirements for these facilities as well as their duties and core principles.
As with our prior proposals regarding security-based swaps, today's proposal stems from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That Act authorizes the Commission to implement a regulatory framework for these types of derivatives.
An important part of this regulatory framework is the creation of security-based SEFs - a new category of markets where security-based swaps can be traded. These trading venues would be required to register with, and be regulated by, the Commission.
Currently, trading in security-based swaps occurs exclusively in the over-the-counter markets with little transparency or oversight. To shed more light on this market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets. In the process, it created this new category of market, the security-based SEFs.
Trading on registered security-based SEFs rather than in the over-the-counter markets should serve to enhance the transparency, efficiency, and competitiveness of the trading of security-based swaps. That is why our rules must be designed to encourage the trading of security-based swaps on these markets in a manner that is transparent and fair.
The first part of the proposal is intended to provide the Commission's answer to the threshold question of "what is a security-based swap execution facility" - essentially, what types of markets would meet the statutory definition.
The second part of the proposal addresses what it means for a security-based swap to be "made available to trade" on a SEF or an exchange. The answer to this question is important because Dodd-Frank requires that any security-based swap subject to mandatory clearing, must be traded on a security-based SEF or a national securities exchange - and not in the over-the-counter market, unless no such SEF or exchange makes that swap available to trade.
The proposal includes a discussion of the Commission's view on how and by whom the determination of what is "made available to trade" should be made.
The third part of the proposal would implement 14 core principles detailed in the legislation with which a security-based SEF must comply. Among other things, each such SEF would be required to have rules relating to:
One key aspect of these rules would detail which entities would be permitted to become a participant on - and therefore have direct access to - a security-based SEF, and would impose standards for fair and impartial access to the SEF.
And, a fourth part of the proposal would put in place a registration process for security-based SEFs. This process would provide comprehensive information for the Commission to evaluate when determining whether to approve an application for registration.
As with all our proposals, our objective here is to provide a framework that allows the security-based swap market to continue to develop in a more transparent, efficient, and competitive manner.
Today's proposal has been informed by the substantial comment we have already received from market participants and we look forward to hearing whether the proposal will achieve our objective.
This is an important and complex undertaking which adds a significant new component to the regulatory framework for over-the-counter derivatives.
Before I turn to Robert Cook, Director of the Division of Trading and Markets, to discuss the proposed rules, I would like to thank Robert as well as Jamie Brigagliano, Heather Seidel, Gregg Berman, Nathaniel Stankard, Tom Eady, Nancy Sanow, David Liu, Constance Kiggins, Molly Kim, Leah Mesfin, Susie Cho, Michou Nguyen, Heidi Pilpel, Steven Varholik, Iliana Lundblad, and Sarah Schandler from the Division of Trading and Markets for their hard work on this rulemaking.
I also would like to thank David Blass, David Dimitrious and Sarah Buescher from the Office of General Counsel; Amy Edwards, Scott Bauguess, Adam Glass, and Sandra Mortal from the Division of Risk, Strategy, and Financial Innovation; and Amy Starr from the Division of Corporation Finance.
Finally, I would like to thank my colleagues on the Commission and their counsels for their work and comments on the proposed rules.
Now I will turn the meeting over to Robert Cook to hear more about the Division's recommendations.