SEC Issues No-Action Accommodations Regarding Security-Based Swap (SBS) Compliance | Practical Law

SEC Issues No-Action Accommodations Regarding Security-Based Swap (SBS) Compliance | Practical Law

The SEC provided clarification regarding certain compliance matters related to the upcoming registration deadline for security-based swap dealers (SBSDs). The SEC also granted relief through September 1, 2022 for SBSDs and MSBSPs, as well as affected nonbank SBSDs, from certain provisions of Exchange Act Rule 18a-3 requiring collection of initial margin (IM) from a Phase 6+ IM counterparty ($50 billion AANA or less).

SEC Issues No-Action Accommodations Regarding Security-Based Swap (SBS) Compliance

Practical Law Legal Update w-032-3653 (Approx. 7 pages)

SEC Issues No-Action Accommodations Regarding Security-Based Swap (SBS) Compliance

by Practical Law Finance
Published on 26 Aug 2021 • USA (National/Federal)
The SEC provided clarification regarding certain compliance matters related to the upcoming registration deadline for security-based swap dealers (SBSDs). The SEC also granted relief through September 1, 2022 for SBSDs and MSBSPs, as well as affected nonbank SBSDs, from certain provisions of Exchange Act Rule 18a-3 requiring collection of initial margin (IM) from a Phase 6+ IM counterparty ($50 billion AANA or less).
On August 5, 2021, the SEC issued the following no-action letters in response to joint requests from ISDA® and SIFMA for relief from compliance with certain security-based swaps (SBS) rules:

SBSD Relief

In the SBSD NAL, the SEC acknowledges that the disparity among the following dates may give rise to significant uncertainty and other issues raised by ISDA and SIFMA:
The SBSD NAL also notes that if an SBSD files a complete application before the November 1, 2021 due date, the SBSD will be conditionally registered and will fall within the scope of the applicable rules, as of:
  • the later of the date when it files such application; or
  • October 6, 2021.
In addition, the SBSD NAL notes that, as pointed out by ISDA and SIFMA, voluntary early registration as an SBSD is not a satisfactory solution to these issues since early registration would deprive affected firms of much needed time to implement the SEC’s SBSD rules.
Therefore, under the SBSD NAL, the SEC staff will not recommend enforcement action during the period from October 6, 2021 to November 1, 2021 if:
  • During the period from August 6, 2021 to November 1, 2021, in connection with the exception to counting certain SBS transactions arranged, negotiated, or executed (ANE SBS transactions) toward the SBSD de minimis threshold under Exchange Act Rule 3a71-3(d), a majority-owned affiliate of a “Relying Entity” that satisfies all of the conditions of Rule 3a71-3(d) acts as the “Registered Entity” for purposes of the “Registered Entity Condition” without the Registered Entity being registered as an SBSD so long as:
    • the party that would otherwise be the Registered Entity registers with the SEC as an SBSD by no later than November 1, 2021;
    • both the Relying Party and the Registered Entity comply with all of the other conditions required pursuant to Rule 3a71-3(d), other than as set out below.
  • During the period from August 6, 2021 to October 6, 2021, in connection with the exception to counting certain ANE SBS transactions set forth in Exchange Act Rule 3a71-3(d), the party that is or would otherwise be the Registered Entity fails to comply with the "counterparty notice condition" or the "as if condition," so long as the party that would otherwise be the Registered Entity either:
    • is registered as with the SEC as a broker-dealer; or
    • registers with the SEC as an SBSD by no later than November 1, 2021.
  • During the period from October 6, 2021 to November 1, 2021, a person engages in broker activities in SBS with or for an eligible contract participant (ECP) without registering as a broker under Section 15(a) of the Exchange Act and without being registered as an SBSD, as required to comply with the "temporary broker exemption," so long as:
    • such person registers with the SEC as an SBSD by no later than November 1, 2021; and
    • such SBS broker activities would satisfy an applicable exemption from Section 15(a) upon the person becoming a registered SBSD.
  • During the period from October 6, 2021 to November 1, 2021, a broker-dealer continues to rely on the "temporary 10b-10 exemption," so long as the broker-dealer:
    • registers with the SEC as an SBSD by no later than November 1, 2021;
    • complies with the requirements of Exchange Act Rule 15Fi-2 as if such broker-dealer were registered with the SEC as an SBSD; and
    • continues to satisfy the conditions of the temporary 10b-10 exemption during that period.
  • During the period from October 6, 2021 to November 1, 2021, an OTC derivatives dealer continues to rely on the "temporary 15a-1 exemption" until November 1, 2021 so long as the OTC derivatives dealer:
    • registers with the SEC as an SBSD by no later than November 1, 2021; and
    • continues to satisfy the conditions of the temporary 15a-1 exemption during that period.
  • Any US or non-US entity that registers with the SEC as an SBSD in 2021 (including a non-US entity relying on substituted compliance) whose initial chief compliance officer (CCO) annual report would have covered less than six months, fails to file a CCO annual report as required under Exchange Act Rule 15Fk-1(c) within 30 days following the deadline for filing the SBSD's annual financial report for fiscal year 2021, provided that the SBSD’s CCO annual report for its 2022 fiscal year also covers its 2021 fiscal year.
  • A person registered with the SEC as an SBSD or MSBSP does not begin to comply with the portfolio reconciliation requirements in Rule 15Fi-3 until November 8, 2021, which is the first compliance date for Regulation SBSR.
  • For purposes of the SBS legacy account exceptions under paragraphs (c)(1)(iii)(D) and (c)(2)(iii)(B) of Rule 18a-3, a person treats the compliance date under paragraph (b)(6) of Rule 18a-3, which defines the term "security-based swap legacy account," as the later of:
    • October 6, 2021; or
    • the date on which the person registers as an SBSD or MSBSP with the SEC.
  • For purposes of the notice requirement under section 3E(f)(1)(A) of the Exchange Act with respect to non-cleared SBS under paragraph (p)(4) of 15c3-3 and paragraphs (d)(1) and (f)(2) of Rule 18a-4, a person treats the compliance date as the later of:
    • October 6, 2021; or
    • the date on which the person registers as an SBSD or MSBSP with the SEC.
For details on SBSD de minimis thresholds and related rules, see Practice Note, US Derivatives Regulation: Swap Dealer and SBSD Registration Thresholds: De Minimis Exemption from Designation as a Security-Based Swap Dealer.
In the SBSD NAL, the SEC staff strongly encourages entities that are no longer able to rely on the de minimis exception from SBSD registration in Rule 3a71-2 of the Exchange Act as of August 31, 2021 to submit their applications for registration to the SEC as soon as possible thereafter to limit the possibility of technical or logistical issues that could arise.

SBS IM Relief

Exchange Act Rule 18a-3 requires a nonbank SBSD to collect IM from a counterparty unless an exception applies(See Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: IM Threshold Under the SEC Margin Rules). A Phase 6+ counterparty is defined in the SBS IM NAL to mean a counterparty to a non-cleared SBS that, combined with all of its affiliates, has a daily aggregate average notional amount (AANA) of non-cleared swaps, non-cleared SBS, foreign exchange (FX) swaps, and FX forwards in March, April, and May 2021 of $50 billion or less. As noted in the SBS IM NAL, no-action relief is necessary because the compliance dates for the SEC’s IM requirements for non-cleared SBS with these smaller counterparties differs from those compliance dates of other regulators, including the CFTC and US prudential regulators.
The SBS IM NAL observes that SBS transactions between nonbank SBSDs and counterparties below the Phase 5 threshold will become subject to IM requirements under Exchange Act Rule 18a-3 on October 6, 2021. The SBS IM NAL notes that this October 6, 2021 date is ten months before nonbank SBSDs and counterparties become subject to regulatory IM requirements adopted by other regulators, including the CFTC and US prudential regulators (see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: Compliance Date for SEC SBS Margin Rules). The SBS IM NAL notes that this timing difference may create significant unintended impact to the resources of nonbank SBSDs and their SBS counterparties because they will need to accelerate the preparation for regulatory IM requirements for Phase 6 relationships and those below the Phase 6 threshold at the same time the parties are completing preparations with Phase 5 relationships. The SBS IM NAL also notes that market participants are preparing for transition to interbank offered rates (IBORs), including LIBOR, to risk-free rates (RFR) at the end of 2021.
Therefore, under the SBS IM NAL, the SEC staff will not recommend enforcement action if a nonbank SBSD, for purposes of Exchange Act Rule 18a-3(c)(1)(ii)(B) of, does not collect IM from a Phase 6+ counterparty in connection with non-cleared SBS entered into with such counterparty before September 1, 2022, provided the nonbank SBSD makes a record of such Phase 6+ counterparties and preserves the record of those counterparties for a period of not less than three years, with the first two years such records being kept in an easily accessible place.

For Additional Information

For additional information on SBS requirements, see Practice Notes: