SEC to propose conduct rules for swap dealers

Reuters

By Sarah N. Lynch

WASHINGTON (Reuters) - Securities regulators are poised on Wednesday to propose rules for how swap dealers interact with their customers, in a move designed to manage risk and protect clients from abusive practices.

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The two-hundred-plus-page proposal by the Securities and Exchange Commission would also offer added protections for pension funds and municipal entities like Jefferson County, Alabama, which was brought to the brink of bankruptcy in the crisis after an interest-rate swap deal went sour in 2007.

The rules, required by the Dodd-Frank Wall Street overhaul law, would apply to large security-based swap traders and dealers such as Goldman Sachs, Morgan Stanley and JPMorgan Chase that deal in products like credit-default swaps and equity derivatives.

The agency is expected to vote later on Wednesday to put the proposal out for public comment.

The Dodd-Frank law requires swap dealers to monitor trading, establish risk management systems and disclose key information about the terms of their swap trades, practices and financial integrity protections.

It also imposes special requirements on dealers who act as either counterparties or advisers to "special entities," including municipalities, endowments and pension plans, who may be less sophisticated and at greater risk.

Dealers who advise these types of clients are required by the law to act in their clients' best interests. Dealers who act as counterparties to the trades, meanwhile, have to make sure the special entities have an independent representative to act in their best interest.

The SEC's proposal comes more than six months after the Commodity Futures Trading Commission first proposed its own business conduct standards for the dealers it regulates, which includes those offering commodity, interest-rate and foreign exchange swaps.

The CFTC's proposal has been criticized by the swap industry for going beyond the Dodd-Frank requirements.

In particular, the industry has said the CFTC's plan takes a sweeping view on what constitutes providing "advice" to special entities.

In doing so, swap dealers fear they could suddenly be dubbed advisers and be required to act in their clients' best interest.

This in turn would effectively preclude them from selling swaps to customers, because it would be impossible to act in their clients' best interest and simultaneously trade with them for their own financial gain.

Since then, however, there have been approximately 30 meetings between the CFTC, SEC and industry players to review the rules.

The SEC has had the benefit of reviewing all of the comments the CFTC received and will likely adjust its proposal to address some of those concerns.

(Reporting by Sarah N. Lynch; Editing by Tim Dobbyn)