Oct. 30, 2022
October 30, 2022
My core recommendations include the following points:
Antifraud - Expand the antifraud provisions to fully encompass fraud in
connection with SBS transactions, including fraud that affects the value of
any right or the performance of any obligation under an SBS over time
SBS data repositories- Require that market participants have equal and fair
access to data on SBS transactions that reported data is subject to uniform
aggregation, formatting, and dissemination requirements that data is
reported on the components of complex SBS transactions that hedge
equivalents are included that meaningful corporate governance
requirements apply to SBS data repositories, including independent boards
and ownership and voting restrictions and establish a meaningful role for
Chief Compliance Officers
SBS execution facilities (\"SEFs\") - Require that the SEF trading platform be
a limit order book or at least an RFQ to all participants to achieve maximum
transparency that \"available to trade\" is interpreted according to its plain
meaning and not encumbered by additional trade volume thresholds that
no SEF is allowed to provide preferential data access that revenue sharing,
volume discounts, rebates, and other unfair practices by SEFs are
prohibited that abusive trading practices, including those favored by high
frequency traders, are prohibited and that SEF Chief Compliance Officers
have the power and autonomy to play a meaningful role
Business conduct standards for SBS dealers and major SBS participants
(\"SBS entities\") -Require that SBS entity disclosures regarding SBS
transactions are complete, timely, and in writing expand application of the
best interest standard to dealings with all participants, not only special
entities and enhance protections for Chief Compliance Officers
Capital requirements for SBS entities- Apply the same capital requirements
for SBS activities, regardless of whether the entity is a broker-dealer or SBS
dealer prohibit the use of proprietary risk weighting models in favor of a
standardized approach jettison risk weighting strategies and replace them
with simpler, lower leverage ratios prohibit netting of derivatives
exposures when calculating potential losses and eliminate VaR-based
modes for calculating capital charges
Data reporting- Require the dissemination of aggregated data about SBS
transactions in a uniform and useful format for the benefit of market
participants as well as regulators shorten the delay for the release of data
on block trades and ensure that size thresholds are determined by the Commission, not individual SDRs with conflicting business interests
increase the amount of reportable information to include data on
disaggregated customized SBS as well as collateral arrangements for SBS
and shorten the time limit for reporting data to SDRs
End-user exception- Require reporting of more information about how an
end-user will meet its obligations under non-cleared SBS, including
information about the terms of forbearance arrangements, how margin will
be paid if credit triggers are activated, the role of any guarantors, the nature
of any posted collateral, and limits on re-hypothecation and require
reporting of additional information to ensure that reliance on the end-user
exception is bona fide, including information about the specific risks being
hedged and how the SBS will hedge those risks
Clearing agencies - Provide more detailed standards for calculating margin,
including standards that reflect liquidity and the minimum amount of
historical data that must be considered in defining normal market
conditions for a given derivative require intra-day calculations of credit risk
exposure when circumstances warrant define \"extreme but plausible
market conditions\" for purposes of calculating the financial resources that
clearing agencies must maintain, and make clear that the definition must be
framed in terms of unprecedented periods of illiquidity and volatility, rather
than statistical analysis of historical price moves apply the conflict of
interest safeguards to all types of clearing agencies establish an aggregate
ownership limit of 25 percent for members and certain market participants
require clearing agency boards to have a majority of independent directors
and enhance measures to protect Chief Compliance Officers from improper
interference and influence.
Registration of SBS entities - Strengthen the registration regime so that it
relies far less on industry assurances provide for the Commission to
independently investigate each SBS entity to determine fitness for
registration at a minimum, require an external audit of each SBS entity as
part of the registration process define the \"operational, financial, and
compliance capabilities\" that each entity must certify as a condition of
registration and establish a mandatory licensing regime for the associated
persons of SBS entities.
All of these recommendations continue to be relevant and important, just as they
were prior to issuance of the Commission's cross-border proposal or the CFTC's final
rules implementing Title VII, and they should be adopted and incorporated as the
Proposed Rules are finalized.
Thank you,
Jonathan De Arcos