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Dodd-Frank: SEC Drafts Swaps Proposal

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The U.S. Securities and Exchange Commission (SEC) has posted a proposed rule that could shape swaps governance systems.

The SEC is writing major new swaps market regulations to implement the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, which defines the term “swap” and will require large financial institutions to conduct many swaps trades through clearinghouses, exchanges or other entities.

The act calls for the SEC to oversee “securities-based swaps” and the Commodity Futures Trading Commission (CFTC) to oversee other types of swaps.

The draft rule, Proposed Regulation MC, is supposed to “mitigate potential conflicts of interest that could exist at these entities,” SEC officials say in a preamble to the proposed rule.

Draft provisions deal with matters such as ownership, voting, and governance policies involving entities that involved with securities-based swaps.

Insurance groups and the SEC are still trying to define what the exact scope of SEC’s involvement in regulation of swaps at insurers and insurance holding companies will be, but the SEC

will have some ability to regulate swaps at “nonbank financial companies.”

SEC officials note that they want the rules to be light enough to encourage competition in the securities-based swaps market but tough enough to prevent conflicts of interest and help reduce risk.

“As commenters review the instant proposals, they are urged to consider generally the role that regulation may play in fostering or limiting the development of the market for security-based swaps (or, vice versa, the role that market developments may play in changing the nature and implications of regulation) and specifically to focus on this issue with respect to the proposals to mitigate conflicts of interest for security-based swap clearing agencies,” officials say.

Comments on the draft rule are due Nov. 26.


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