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SEC May Adopt New Rules To Define Market Terms

4/18/2012 1:02 PM ET

The Securities Exchange Commission (SEC) held an open meeting Wednesday morning to consider whether to adopt rules that would further define a series of terms related to the swaps market. The terms include "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant."

If adopted, the joint rules of the SEC and the Commodities Futures Trading Commission (CFTC) would define the terms "security-based swap dealer" and "major security-based swap participant" as part of the Securities Exchange Act of 1934, according to an email from the SEC.

In developing these definitions, the SEC staff was informed by existing information regarding the single-name CDS market, which will constitute the vast majority of security-based swaps. The SEC staff also relied on the dealer-trader distinction, which informs determinations regarding dealer status in the traditional securities market and which already is used by participants in that market, the SEC statement said.

If the SEC adopts the rule changes, the term "security-based swap dealer" would then be defined as someone who holds themselves out as a dealer in security-based swaps. The term would also be defined as someone who makes a market in security-based swaps, and regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account.

Furthermore, a "security-based swap dealer" would also be defined as a person who engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.

The term "major security-based swap participant" would then be defined by the SEC as a person who maintains a "substantial position" in any of the major security-based swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.

Also, the definition would include a person whose outstanding security-based swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. banking system or financial markets." The new definition would involve any "financial entity" that is "highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency" and that maintains a "substantial position" in any of the major security-based swap categories.

According to the SEC's statement, these new rules would become effective 60 days after the date of publication in the Federal Register. However, dealers and major participants would not have to register with the SEC until the dates that will be provided in the SEC's final rules for the registration of dealers and major participants.

by RTT Staff Writer

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