Focusing on what was formerly a largely unregulated market, the Securities and Exchange Commission has proposed rules this week directed towards mitigation of conflicts of interest in security-based swaps. The SEC says investors need protection in this area and the current regulatory picture has what it calls, "gaps."
Title VII of the Dodd-Frank Act authorizes the SEC to regulate security-based swaps and more specifically, "Section 765 directs the Commission to adopt rules to mitigate conflicts of interest." Proposed Regulation MC is targeted at the swap clearing agencies, execution facilities and national securities exchanges that either make security-based swaps available for trading or that post them.
SEC Chairman Mary L. Schapiro explained at a recent Open Meeting that in order to achieve conflict of interest mitigation, the law provides that the SEC's rules "can limit control or voting rights with respect to any security-based swap clearing agency, security-based swap execution facility, or exchange that posts or makes available for trading security-based swaps."
Chairman Schapiro noted that "[t]he concern about conflicts of interest stems from the fact that the over-the-counter derivatives markets have a relatively high concentration of market activity through a limited number of dealers -- and those dealers earn significant revenues from their transactions in an opaque over the counter market."
The SEC's proposal is similar to the Commodity Futures Trading Commission's proposed rules concerning derivatives clearing organizations.
For more detailed information regarding SEF's, the conflict of interest concerns, and the specific proposed alternatives for ownership, voiting and governance, please review the statement issued by the SEC and Chairman Shapiro's recent speech regarding the proposal.
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