The Securities and Exchange Commission (SEC) proposes rules on security-based swaps requiring public reporting of large positions, enforcing anti-fraud and anti-fraud requirements and prohibiting actions to exert undue influence on a CCO – Companies Law / Trade Law

The Securities and Exchange Commission (SEC) proposes rules on security-based swaps requiring public reporting of large positions, enforcing anti-fraud and anti-fraud requirements and prohibiting actions to exert undue influence on a CCO – Companies Law / Trade Law

On December 15, 2021, the Securities and Exchange Commission (“SEC”) voted 3-2 to propose three rules under the Securities Act of 1934 (“the Stock Exchange Act”) regarding securities-based swaps.1 The proposed Rule 10b.1 requires anyone with a position in security-based swaps to provide a schedule that publicly discloses information regarding a person’s security-based swap positions and related positions in the indicated debt, equity, or loan if the person’s security-based swap is The holdings and other holdings identified in the reference and related instruments exceed the reporting thresholds of the proposed rule. The proposed Rule 9J-1, which was re-proposed as of 2010, would prohibit the specific activities that constitute fraud, manipulation and deception in connection with, among other things, the purchase and sale of securities-based swaps and the entering into of any rights thereunder. Proposed Rule 15Fh-4(c) would prohibit certain actions deemed to exercise undue influence over the Chief Compliance Officer (“CCO”) of a security-based swap dealer or a principal participant in a security-based swap (“SBS Entities”).

The proposed rules are intended to fulfill the SEC’s mandate to regulate security-based swaps in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).2

While Commissioners Carolyn Crenshaw and Alison Hearn Lee made statements in support of the proposed rules,3Commissioners Hester M. objected. Pierce and Elad L. Roseman.4 Commissioner Pierce stated that the reporting rules “may squash legitimate market activity” and appear to be “premature” given that new requirements for reporting security-based swap transactions will come into effect in February 2022 and the impact of that report is yet to come. realized or analyzed.5 Commissioner Roisman similarly stated that it was not clear that the large amount of information to be reported under proposed Rule 10B-1 would be effective in achieving the stated objectives.6

1. Reporting requirements for large deals in security-based swaps

Rule 10b-1 requires any person, or group of persons, who holds security-based swap positions above the specified limit amounts, to promptly submit a statement containing the information requested in Schedule 10b on the EDGAR.7 The calculation of holdings for purposes of minimum amounts requires the inclusion of the security-based swap position, the holdings of the indicated instrument, and the holdings of other specific instruments that provide exposure to the indicated instrument. The SEC noted in its proposal statement that this transparency could provide both regulators and the public with advance notice that certain market participants are building large positions, facilitate risk management, pricing security-based swaps, and generally allow market participants to act in an informed manner. To protect their own interests and reduce potential adverse consequences.8

Under the proposed rule, counterparties to a security-based swap triggering reporting requirements would be required to disclose, among other information: (i) the position of the security-based swap (including direction, i.e. long or short); (ii) Positions in any security or underlying loan of a securities-based swap position; (3) Other swaps based on securities for other securities of the same issuer referred to. (iv) positions in other instruments relating to the swap position based on the securities, the security or the loan referred to, or the group or index of securities or loans; and (5) specific identifying information in relation to the reporting person.9 Reportable security-based swaps are limited to security-based swaps: (i) subject to transaction reporting under Rule 908 of 17 CFR 242.900 through 242.909 (the “SBSR”); or (ii) is entered into by a person who also has an interest in the securities underlying the securities-based swap (or is considered the beneficial owner of such securities for purposes of Section 13(d) of the Stock Exchange Act and the rules and regulations made thereunder) if (i) an issuer is created The securities are referred to as a United States entity and have their principal place of business in the United States or (ii) the instrument referred to is part of a class of Securities registered under Section 12 or 15(d) of the Exchange Act. The proposed rule will apply to both authenticated and non-obvious security-based swaps.10

The term “security-based barter” is not defined in the proposed rule but is generally defined in Section 3(a) (68) of the Exchange Act to mean an agreement, contract or transaction that constitutes a “barter” as defined in Section 1a of the Exchange Act commodity and is based on: (i) a narrow-based security index, including the interest in it or its value; (ii) a single security or loan, including any interest therein or on its value; or (iii) the occurrence, non-occurrence or extent of an event relating to a single issuer of securities or two issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial position, or financial obligations of the issuer.

The minimum amounts that would trigger reports vary based on the type of security-based swap and are calculated based on the security-based swap and, in some cases, other relevant holdings of the reporting person.

For security-based swaps that are default swaps (“CDS”), the minimum CDS position is less than: (i) a notional long amount of $150 million, calculated by subtracting the notional amount of any long positions in the security The deliverable debt underlying the securities-based swap from the notional long amount of the securities-based swap position; (ii) A notional short amount of $150 million; or (iii) an estimated total amount of $300 million.11 As noted, to the extent a person maintains a long CDS risk, a long hedge position will reduce the face value for purposes of determining whether the $150 million minimum is met, but will not reduce the maximum total notional amount for purposes of 300 Million dollar threshold.12


1 prohibit fraud, manipulation or deception in connection with security-based swaps; Prohibition of undue influence on senior compliance officials; Reporting a position for large security-based swap positions, Exchange Act Rel. No. 93784 (December 15, 2021) (“Proposed Release”), Available here; The SEC proposes rules to prevent fraud in connection with security-based swap transactions, to prevent undue impact on CCOs and to require reporting of large security-based swap positions, SEC Press Release 2021-259 (December 15, 2021) (“Statement journalist”), Available here

2 We see Commissioner Carolyn Crenshaw, Statement on the Proposed Prohibition against Fraud, Manipulation or Deception in Relation to Security-Based Swaps (December 15, 2021), Available here.

3 same reference; Commissioner Alison Hearn Lee, Standing in the Security-Based Barter System: Statement on Proposed Rules for Anti-fraud, Situation Reporting and CCO Support (December 15, 2021), Available here.

4 Commissioner Hester M. Peirce, Dissenting Statement on Proposed Security Swap Rules (15 December 2021), Available here; Commissioner Elad L. Roisman, Dissenting Statement on Proposed Security Tradeoffs Rules (December 15, 2021), Available here. On December 20, 2021, Commissioner Roisman resigned from the Securities and Exchange Commission, and indicated that he expects to leave before the end of January 2022.

5 We see Commissioner Hester M. Pierce, Dissenting Statement on Proposed Security Barter Rules, Note 4 above (which also expresses concern that prohibiting attempted fraudulent conduct (as well as actual conduct) could create uncertainty for market participants who may be concerned about how Action by the SEC or counterparties will assess “until innocuous behavior later,” and that “artificial credit events” and other opportunistic strategies involving security-based trade-offs may not be dangerous enough to warrant regulation). Transaction reporting for security-based exchanges has been required since November 8, 2021, and public publication will begin on February 14, 2022.
We see SEC approves registration of first security-based exchange data repository; Setting the date for first compliance with the SBSR, SEC Press Release No. 2021-80 (May 7, 2021), available here.

6 Commissioner Elad L. Roesman, Dissenting Statement on Proposed Security Tradeoffs Rules, above Note 4.

7 As indicated below, certain thresholds are calculated by reference to holdings in the indicated securities and other related instruments.

8 We see Press release.

9 We see Proposed Article 10b-1(b)(3).

10 We see Release proposal at 62.

11 We see Proposed Article 10b-1(b)(i)(i)

12 The Securities and Exchange Commission provides the following example of how these provisions work: If a person owns $125 million in bonds on ABC and buys $200 million in default swaps on those bonds, then these two positions will offset each other, like net collateral – it will be The swap position is based on $75 million, and reporting pursuant to the proposed rule 10b-1 will not be required because the net exposure is less than $150 million. However, if a person owns $250 million of bonds in ABC and buys $325 million in default swaps on that bond, the person will be required to report that situation under Proposed Rule 10b-1 because the total security-based swap position exceeds $300 million, although these two positions would offset each other to create a net exposure of $75 million. We see Proposed release at 75.

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The content of this article is intended to provide a general guide to the topic. It is recommended to take the advice of specialists in such circumstances.

The content of this article is intended to provide a general guide to the topic. It is recommended to take the advice of specialists in such circumstances.


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