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June 10, 2022

SEC Proposal Will Bring Transparency and Accountability to Security-Based Swaps Market, But Some Gaps Would Remain

Better Markets filed a comment letter in response to the Securities and Exchange Commission’s proposed rules on requirements for security-based swap execution facilities

Why It Matters. Security-based swaps (“SBS”), especially credit default swaps, were among the prime culprits of the financial crisis.  Once heralded as innovative, risk-reducing financial instruments, these dangerous and unregulated derivatives enabled the boom in irresponsible subprime mortgage lending, fueling the financial crisis.  In response to their role nearly bringing the financial system to the brink of collapse, Congress sought to bring greater transparency and accountability to these markets by requiring them to be traded on comprehensively regulated security-based swap execution facilities (“SBSEFs”).

What We Said. Overall, the Proposal will bring greater transparency and accountability to the SBS market.  However, it falls short in several respects.  Instead of requiring that any exchange that facilitates the trading of swaps register as an SBSEF, it carves out single-dealer platforms from the registration requirement, which will keep some segment of SBS trading dangerously opaque and out of sight of regulators and the public.  It also would allow SBSEFs to self-certify new products, which could allow the proliferation of dangerous products with little regulatory oversight.  And its cross-border provisions must be strengthened to prevent evasion of its requirements.

Bottom Line. Better Markets generally supports the proposal, which will bring much needed transparency and accountability to the SBS market, which nearly brought down the financial system in 2008. However, we have concerns that the proposal will be undermined by a loophole for single-dealer platforms that has no statutory basis, an unnecessary self-certification process for new products, and weak cross-border provisions that could facilitate evasion.

Comment Letters
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