(July 9, 2012) — The Securities and Exchange Commission (SEC) has taken another step toward regulating the over-the-counter derivatives market by unanimously approving rules and interpretations for certain derivative products.
According to a release by the US regulator, the SEC rules and interpretations further define the terms “swap” and “security-based swap” and whether a particular instrument is a “swap” regulated by the Commodity Futures Trading Commission (CFTC) or a “security-based swap” regulated by the SEC. “Approving the product rules and interpretations is another foundational step in the establishment of a new regulatory regime for derivatives,” said SEC Chairman Mary L. Schapiro. “I look forward to action on the rules and interpretations by my colleagues at the CFTC.”
Furthermore, the SEC action also addresses “mixed swaps,” which are regulated by both agencies, and “security-based swap agreements,” which are regulated by the CFTC but over which the SEC has anti-fraud and other authority.
The rules and regulations were written with the CFTC implement provisions of the 2010 Dodd-Frank Act, which establishes a framework for regulating over-the-counter derivatives. Once both agencies adopt the final rules, they will become effective 60 days after the date of publication in the Federal Register.
The use of derivatives have been increasingly questioned and scrutinized in light of greater regulation. Earlier this year, a report by consulting firm Towers Watson noted that high fees and complex counterparty structures may drive institutional investors away from using derivatives as regulators agree on the terms on how to legislate practices in Europe. In a paper entitled “Is this the end of OTC derivatives for pension schemes?” Towers Watson laid out how changes in regulations and market attitude to these investment tools would make it more costly and complicated for investors to use them. The paper said that underlying terms in documentation had already become less attractive for investors.
“Flexibility over which assets can be used as eligible collateral has also reduced significantly,” the paper noted. “It appears that counterparty banks are less willing, or able, to accommodate pension schemes. This stems from a reduction in banks’ risk appetites and changes in their regulation.”
Related article: Pension Funds to Drop Derivatives?