SEC Releases Analysis to Support Key Swaps Rule

The Securities and Exchange Commission on Thursday released a new economic analysis that will be used to justify a critical final rule that will determine which companies will face new regulations of their derivatives trading.

Opponents of new regulations have been successful in overturning SEC rules by challenging the quality of supporting economic analysis and by complaining interested parties were given insufficient time to comment.

The 41-page analysis of the credit-default swap market comes as the SEC and Commodity Futures Trading Commission are still struggling to agree on joint final rules that will define who will be designated as a "swap dealer" and "major swap participant."

"The SEC staff believes that the analysis of market data has the potential to be informative for evaluating certain final rules," the SEC said in a statement. "The SEC staff is making this analysis available to allow the public to consider this supplemental information."

The 2010 Dodd-Frank Wall Street overhaul law requires the SEC and CFTC to impose a series of stringent new regulatory requirements on companies such as Goldman Sachs and Morgan Stanley, which deal heavily in derivatives products.

Any company dubbed a dealer or major trader of swaps will be required to set aside more capital and margin. Dealers will also be subject to new business conduct standards.

Under the law, the SEC will oversee trading and dealing in security-based swaps, such as credit-default swaps. The CFTC, meanwhile, will oversee the vast majority of the market, which includes interest-rate swaps and commodity-linked swaps.

The definitions for dealers and major traders must be jointly written by both agencies. But for the past few months, plans to finalize the rules have been delayed numerous times and the CFTC has been forced to cancel open meetings.

DEBATE ON THRESHOLD

One trouble spot for regulators has centered on an agreement over what threshold should be used to determine which companies will be classified as swap dealers.

Earlier this month, the CFTC and SEC were in talks about setting the threshold at $3 billion, which would be based on the notional value of a company's annual swaps trade.

That figure is significantly higher than the $100 million figure the agencies first proposed in December 2010.

Disagreements between the agencies over the appropriate threshold fueled delays, with some officials fearful that a threshold set too low could unfairly capture legitimate hedgers who don't create systemic risk or problems to the marketplace.

The SEC's analysis lays out different kinds of information that may be used to help determine when a firm might be dubbed a dealer.

It also provides CDS gross notional position data that may help predict how many firms will fall into the dealer category.

The CFTC, which is currently locked in a legal battle with industry trade groups over the quality of its cost-benefit analysis for a different Dodd-Frank rule, has so far not issued any similar studies on the swap dealer definition rule.

With the SEC seeking public comments on its economic data that will be used to underpin the rule, it is unlikely the two agencies will be ready to vote in the very near-future.

The SEC said, however, that it hopes to consider adoption of the rule "in the next several weeks."