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June 10, 2022

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

WASHINGTON, D.C.—Legal Director and Securities Specialist Stephen Hall issued the following statement on the filing of Better Markets’ Comment Letter to the Securities and Exchange Commission in response to the agency’s proposed rules on security-based swap execution facilities:

“These rules have taken years to develop but they will finally establish a critical set of reforms we need to help reduce the risk of another financial crisis.  In the lead up to the historic near-collapse of our financial system in 2008, dangerous derivatives, such as credit default swaps, helped concentrate massive amounts of hidden risk between financial institutions, beyond the view of regulators.  When the real estate market collapsed, rife with fraudulent mortgages, the network of derivatives deals keyed to those mortgages imposed huge, sudden, and widespread losses on many financial institutions, bringing the economy to the brink.

“That is why Congress passed the Dodd-Frank Act, requiring the trading of credit default swaps and other security-based swaps (“SBS”) to take place in the open, on regulated exchanges known as security-based swap execution facilities (“SBSEFs”), where regulators will have greater insight into where risk is building up in the system, and where fraud, manipulation, and other abuses can be more easily policed.

“Overall, the Proposal will bring greater transparency and accountability to the SBS market.  However, it falls short in several respects.  Instead of requiring that all exchanges that facilitate 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 new types of derivatives with potentially inadequate regulatory screening.  And its cross-border provisions must be strengthened to prevent evasion of the SEF trading requirements where activity occurs overseas but still threatens to import risk back to the U.S.”

Read our full Comment Letter here or click the button below.

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