Mary Shapiro Chairman Securities and Exchange Commission

Good morning.  This is an open meeting of the U.S. Securities and Exchange Commission on Oct. 17, 2012.

Today we will consider proposing new rules that would establish capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants.  We also will consider enhancing the capital requirements for the large broker-dealers that we have approved to use internal models in computing their net capital.

The proposals we are considering today stem from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act – the Act that authorizes the Commission and other regulators to put in place a comprehensive framework for regulating the over-the-counter swaps markets.

If today’s proposal passes, the SEC will have proposed – and in some cases adopted – substantially all of the rules that create the new regulatory regime for derivatives within our jurisdiction. 

• Already, we have finalized the definitions of what constitutes a security-based swap and defined the key types of intermediaries in these markets.
• We have proposed rules governing the trading markets – or execution facilities – that bring together multiple participants to engage in these transactions.
• We have proposed rules defining the process by which the Commission will determine which security-based swaps would be required to be cleared through clearing agencies that step in-between  the counterparties and effectively assume the risk should there be a default.
• We have proposed rules outlining the requirement to report trade data to data repositories and have defined the duties of those repositories, including disclosure of trade data to the public.
• We have proposed business conduct standards for security-based swap dealers. .

Together, these rules are intended to make the financial system safer, and the derivative markets fairer, more efficient, and more transparent. 

One of the ways the Dodd-Frank Act sought to achieve this goal was by requiring rules that would impose certain margin and capital requirements upon security-based swap dealers.

Congress intended for these rules to:

• Help ensure the safety and soundness of security-based swap dealers and major security-based swap participants.
• Be appropriate for the risk associated with uncleared security-based swaps.

The goal of the proposed segregation rules is to help ensure that customer property can be promptly returned to customers from a security-based swap dealer, for example, either before or during a liquidation proceeding if a security-based swap dealer fails.   

In shaping these proposals, the staff drew upon its experience with the financial responsibility rules for broker-dealers – rules that have been administered by the Commission for many years and that are familiar to many market participants.  The broker-dealer rules serve as a starting point for today’s proposals, not just because of familiarity with these rules, but also because of similarities between the financial markets for securities and security-based swaps. 

Like the broker-dealer rules, these proposals place heavy importance on requiring security-based swap dealers to hold liquid assets that are readily available in times of crisis, given that security-based swap dealers regulated by the Commission, unlike dealers that are banks, will not have access to certain sources of bank funding.  At the same time, the proposals contain many numerical thresholds and limits that have not been applied and tested in the markets for security-based swaps, which is why we are very interested in public comment in helping us to determine whether and how to adjust those provisions.

In framing these proposals, we also have been cognizant of corollary rules that have been proposed by the CFTC and the bank regulators for entities under their jurisdiction.  These rules reflect both similarities and differences with those advanced by the other regulators.  Some differences may be justified by differences in the markets or the types of entities to which the various rules apply.  Again, we seek and will closely consider public comment on those questions, and of course we will also work closely with our fellow regulators as we do so. 

Before I turn the meeting over to Robert Cook, Director of the Division of Trading and Markets, to discuss the proposed rules, I would like to express my thanks to Robert as well as John Ramsay, Mike Macchiaroli, Tom McGowan, Randall Roy, Nathaniel Stankard, Mark Attar, Sheila Swartz, Valentina Deng, Teen Sheng, Amar Kuchinad, and Gregg Berman from the Division of Trading and Markets for their tremendous work on this rulemaking.

Thanks as well to Meridith Mitchell and Andrew Glickman from the Office of the General Counsel, and Craig Lewis, Jennifer Marietta-Westberg, and Christof Stahel from the Division of Risk, Strategy, and Financial Innovation.

Finally, I would like to thank the Commissioners and all of our counsels for their work and comments on the proposed rules.

Now I'll turn the meeting over to Robert Cook to hear more about the Division's recommendations.