15 USC 78o-10 - Registration and regulation of security-based swap dealers and major security-based swap participants

U.S Code last checked for updates: Nov 22, 2024

§ 78o–10.

Registration and regulation of security-based swap dealers and major security-based swap participants

(a)

Registration

(1)

Security-based swap dealers

(2)

Major security-based swap participants

(b)

Requirements

(1)

In general

(2)

Contents

(A)

In general

(B)

Continual reporting

(3)

Expiration

(4)

Rules

(5)

Transition

(6)

Statutory disqualification

(c)

Dual registration

(1)

Security-based swap dealer

(2)

Major security-based swap participant

(d)

Rulemaking

(1)

In general

(2)

Exception for prudential requirements

(A)

In general

(B)

Applicability

(e)

Capital and margin requirements

(1)

In general

(A)

Security-based swap dealers and major security-based swap participants that are banks

(B)

Security-based swap dealers and major security-based swap participants that are not banks

(2)

Rules

(A)

Security-based swap dealers and major security-based swap participants that are banks

The prudential regulators, in consultation with the Commission and the Commodity Futures Trading Commission, shall adopt rules for security-based swap dealers and major security-based swap participants, with respect to their activities as a swap dealer or major swap participant, for which there is a prudential regulator imposing—

(i)

capital requirements; and

(ii)

both initial and variation margin requirements on all security-based swaps that are not cleared by a registered clearing agency.

(B)

Security-based swap dealers and major security-based swap participants that are not banks

The Commission shall adopt rules for security-based swap dealers and major security-based swap participants, with respect to their activities as a swap dealer or major swap participant, for which there is not a prudential regulator imposing—

(i)

capital requirements; and

(ii)

both initial and variation margin requirements on all swaps that are not cleared by a registered clearing agency.

(C)

Capital

(3)

Standards for capital and margin

(A)

In general

To offset the greater risk to the security-based swap dealer or major security-based swap participant and the financial system arising from the use of security-based swaps that are not cleared, the requirements imposed under paragraph (2) shall—

(i)

help ensure the safety and soundness of the security-based swap dealer or major security-based swap participant; and

(ii)

be appropriate for the risk associated with the non-cleared security-based swaps held as a security-based swap dealer or major security-based swap participant.

(B)

Rule of construction

(i)

In general

Nothing in this section shall limit, or be construed to limit, the authority—

(I)

of the Commission to set financial responsibility rules for a broker or dealer registered pursuant to section 78o(b) of this title (except for section 78o(b)(11) thereof) in accordance with section 78o(c)(3) of this title; or

(II)

of the Commodity Futures Trading Commission to set financial responsibility rules for a futures commission merchant or introducing broker registered pursuant to section 4f(a) of the Commodity Exchange Act [7 U.S.C. 6f(a)] (except for section 4f(a)(3) [7 U.S.C. 6f(a)(3)] thereof) in accordance with section 4f(b) of the Commodity Exchange Act [7 U.S.C. 6f(b)].

(ii)

Futures commission merchants and other dealers

(C)

Margin requirements

In prescribing margin requirements under this subsection, the prudential regulator with respect to security-based swap dealers and major security-based swap participants that are depository institutions, and the Commission with respect to security-based swap dealers and major security-based swap participants that are not depository institutions shall permit the use of noncash collateral, as the regulator or the Commission determines to be consistent with—

(i)

preserving the financial integrity of markets trading security-based swaps; and

(ii)

preserving the stability of the United States financial system.

(D)

Comparability of capital and margin requirements

(i)

In general

(ii)

Comparability

The entities described in clause (i) shall, to the maximum extent practicable, establish and maintain comparable minimum capital requirements and minimum initial and variation margin requirements, including the use of noncash collateral, for—

(I)

security-based swap dealers; and

(II)

major security-based swap participants.

(4)

Applicability with respect to counterparties

(f)

Reporting and recordkeeping

(1)

In general

Each registered security-based swap dealer and major security-based swap participant—

(A)

shall make such reports as are required by the Commission, by rule or regulation, regarding the transactions and positions and financial condition of the registered security-based swap dealer or major security-based swap participant;

(B)

(i)

for which there is a prudential regulator, shall keep books and records of all activities related to the business as a security-based swap dealer or major security-based swap participant in such form and manner and for such period as may be prescribed by the Commission by rule or regulation; and

(ii)

for which there is no prudential regulator, shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation; and

(C)

shall keep books and records described in subparagraph (B) open to inspection and examination by any representative of the Commission.

(2)

Rules

(g)

Daily trading records

(1)

In general

(2)

Information requirements

(3)

Counterparty records

(4)

Audit trail

(5)

Rules

(h)

Business conduct standards

(1)

In general

Each registered security-based swap dealer and major security-based swap participant shall conform with such business conduct standards as prescribed in paragraph (3) and as may be prescribed by the Commission by rule or regulation that relate to—

(A)

fraud, manipulation, and other abusive practices involving security-based swaps (including security-based swaps that are offered but not entered into);

(B)

diligent supervision of the business of the registered security-based swap dealer and major security-based swap participant;

(C)

adherence to all applicable position limits; and

(D)

such other matters as the Commission determines to be appropriate.

(2)

Responsibilities with respect to special entities

(A)

Advising special entities

(B)

Entering of security-based swaps with respect to special entities

(C)

Special entity defined

For purposes of this subsection, the term “special entity” means—

(i)

a Federal agency;

(ii)

a State, State agency, city, county, municipality, or other political subdivision of a State or;

(iii)

any employee benefit plan, as defined in section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002);

(iv)

any governmental plan, as defined in section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002); or

(v)

any endowment, including an endowment that is an organization described in section 501(c)(3) of title 26.

(3)

Business conduct requirements

Business conduct requirements adopted by the Commission shall—

(A)

establish a duty for a security-based swap dealer or major security-based swap participant to verify that any counterparty meets the eligibility standards for an eligible contract participant;

(B)

require disclosure by the security-based swap dealer or major security-based swap participant to any counterparty to the transaction (other than a security-based swap dealer, major security-based swap participant, security-based swap dealer, or major security-based swap participant) of—

(i)

information about the material risks and characteristics of the security-based swap;

(ii)

any material incentives or conflicts of interest that the security-based swap dealer or major security-based swap participant may have in connection with the security-based swap; and

(iii)

(I)

for cleared security-based swaps, upon the request of the counterparty, receipt of the daily mark of the transaction from the appropriate derivatives clearing organization; and

(II)

for uncleared security-based swaps, receipt of the daily mark of the transaction from the security-based swap dealer or the major security-based swap participant;

(C)

establish a duty for a security-based swap dealer or major security-based swap participant to communicate in a fair and balanced manner based on principles of fair dealing and good faith; and

(D)

establish such other standards and requirements as the Commission may determine are appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this chapter.

(4)

Special requirements for security-based swap dealers acting as advisors

(A)

In general

It shall be unlawful for a security-based swap dealer or major security-based swap participant—

(i)

to employ any device, scheme, or artifice to defraud any special entity or prospective customer who is a special entity;

(ii)

to engage in any transaction, practice, or course of business that operates as a fraud or deceit on any special entity or prospective customer who is a special entity; or

(iii)

to engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative.

(B)

Duty

(C)

Reasonable efforts

Any security-based swap dealer that acts as an advisor to a special entity shall make reasonable efforts to obtain such information as is necessary to make a reasonable determination that any security-based swap recommended by the security-based swap dealer is in the best interests of the special entity, including information relating to—

(i)

the financial status of the special entity;

(ii)

the tax status of the special entity;

(iii)

the investment or financing objectives of the special entity; and

(iv)

any other information that the Commission may prescribe by rule or regulation.

(5)

Special requirements for security-based swap dealers as counterparties to special entities

(A)

In general

Any security-based swap dealer or major security-based swap participant that offers to or enters into a security-based swap with a special entity shall—

(i)

comply with any duty established by the Commission for a security-based swap dealer or major security-based swap participant, with respect to a counterparty that is an eligible contract participant within the meaning of subclause (I) or (II) of clause (vii) of section 1a(18) of the Commodity Exchange Act [7 U.S.C. 1a(18)], that requires the security-based swap dealer or major security-based swap participant to have a reasonable basis to believe that the counterparty that is a special entity has an independent representative that—

(I)

has sufficient knowledge to evaluate the transaction and risks;

(II)

is not subject to a statutory disqualification;

(III)

is independent of the security-based swap dealer or major security-based swap participant;

(IV)

undertakes a duty to act in the best interests of the counterparty it represents;

(V)

makes appropriate disclosures;

(VI)

will provide written representations to the special entity regarding fair pricing and the appropriateness of the transaction; and

(VII)

in the case of employee benefit plans subject to the Employee Retirement Income Security act 2

 So in original. Probably should be capitalized.

of 1974 [29 U.S.C. 1001 et seq.], is a fiduciary as defined in section 3 of that Act (29 U.S.C. 1002); and

(ii)

before the initiation of the transaction, disclose to the special entity in writing the capacity in which the security-based swap dealer is acting.

(B)

Commission authority

(6)

Rules

(7)

Applicability

This subsection shall not apply with respect to a transaction that is—

(A)

initiated by a special entity on an exchange or security-based swaps execution facility; and

(B)

the security-based swap dealer or major security-based swap participant does not know the identity of the counterparty to the transaction.

(i)

Documentation standards

(1)

In general

(2)

Rules

(j)

Duties

Each registered security-based swap dealer and major security-based swap participant shall, at all times, comply with the following requirements:

(1)

Monitoring of trading

(2)

Risk management procedures

(3)

Disclosure of general information

The security-based swap dealer or major security-based swap participant shall disclose to the Commission and to the prudential regulator for the security-based swap dealer or major security-based swap participant, as applicable, information concerning—

(A)

terms and conditions of its security-based swaps;

(B)

security-based swap trading operations, mechanisms, and practices;

(C)

financial integrity protections relating to security-based swaps; and

(D)

other information relevant to its trading in security-based swaps.

(4)

Ability to obtain information

The security-based swap dealer or major security-based swap participant shall—

(A)

establish and enforce internal systems and procedures to obtain any necessary information to perform any of the functions described in this section; and

(B)

provide the information to the Commission and to the prudential regulator for the security-based swap dealer or major security-based swap participant, as applicable, on request.

(5)

Conflicts of interest

The security-based swap dealer and major security-based swap participant shall implement conflict-of-interest systems and procedures that—

(A)

establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any security-based swap or acting in a role of providing clearing activities or making determinations as to accepting clearing customers are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision and contravene the core principles of open access and the business conduct standards described in this chapter; and

(B)

address such other issues as the Commission determines to be appropriate.

(6)

Antitrust considerations

Unless necessary or appropriate to achieve the purposes of this chapter, the security-based swap dealer or major security-based swap participant shall not—

(A)

adopt any process or take any action that results in any unreasonable restraint of trade; or

(B)

impose any material anticompetitive burden on trading or clearing.

(7)

Rules

(k)

Designation of chief compliance officer

(1)

In general

(2)

Duties

The chief compliance officer shall—

(A)

report directly to the board or to the senior officer of the security-based swap dealer or major security-based swap participant;

(B)

review the compliance of the security-based swap dealer or major security-based swap participant with respect to the security-based swap dealer and major security-based swap participant requirements described in this section;

(C)

in consultation with the board of directors, a body performing a function similar to the board, or the senior officer of the organization, resolve any conflicts of interest that may arise;

(D)

be responsible for administering each policy and procedure that is required to be established pursuant to this section;

(E)

ensure compliance with this chapter (including regulations) relating to security-based swaps, including each rule prescribed by the Commission under this section;

(F)

establish procedures for the remediation of noncompliance issues identified by the chief compliance officer through any—

(i)

compliance office review;

(ii)

look-back;

(iii)

internal or external audit finding;

(iv)

self-reported error; or

(v)

validated complaint; and

(G)

establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues.

(3)

Annual reports

(A)

In general

In accordance with rules prescribed by the Commission, the chief compliance officer shall annually prepare and sign a report that contains a description of—

(i)

the compliance of the security-based swap dealer or major swap participant with respect to this chapter (including regulations); and

(ii)

each policy and procedure of the security-based swap dealer or major security-based swap participant of the chief compliance officer (including the code of ethics and conflict of interest policies).

(B)

Requirements

A compliance report under subparagraph (A) shall—

(i)

accompany each appropriate financial report of the security-based swap dealer or major security-based swap participant that is required to be furnished to the Commission pursuant to this section; and

(ii)

include a certification that, under penalty of law, the compliance report is accurate and complete.

(l)

Enforcement and administrative proceeding authority

(1)

Primary enforcement authority

(A)

Securities and Exchange Commission

(B)

Prudential regulators

(C)

Referral

(i)

Violations of nonprudential requirements

(ii)

Violations of prudential requirements

(D)

Backstop enforcement authority

(i)

Initiation of enforcement proceeding by prudential regulator

(ii)

Initiation of enforcement proceeding by Commission

(2)

Censure, denial, suspension; notice and hearing

The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, or revoke the registration of any security-based swap dealer or major security-based swap participant that has registered with the Commission pursuant to subsection (b) if the Commission finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, or revocation is in the public interest and that such security-based swap dealer or major security-based swap participant, or any person associated with such security-based swap dealer or major security-based swap participant effecting or involved in effecting transactions in security-based swaps on behalf of such security-based swap dealer or major security-based swap participant, whether prior or subsequent to becoming so associated—

(A)

has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), or (E) of paragraph (4) of section 78o(b) of this title;

(B)

has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under this subsection;

(C)

is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4);

(D)

is subject to an order or a final order specified in subparagraph (F) or (H), respectively, of such paragraph (4); or

(E)

has been found by a foreign financial regulatory authority to have committed or omitted any act, or violated any foreign statute or regulation, enumerated in subparagraph (G) of such paragraph (4).

(3)

Associated persons

With respect to any person who is associated, who is seeking to become associated, or, at the time of the alleged misconduct, who was associated or was seeking to become associated with a security-based swap dealer or major security-based swap participant for the purpose of effecting or being involved in effecting security-based swaps on behalf of such security-based swap dealer or major security-based swap participant, the Commission, by order, shall censure, place limitations on the activities or functions of such person, or suspend for a period not exceeding 12 months, or bar such person from being associated with a security-based swap dealer or major security-based swap participant, if the Commission finds, on the record after notice and opportunity for a hearing, that such censure, placing of limitations, suspension, or bar is in the public interest and that such person—

(A)

has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (A), (D), or (E) of paragraph (4) of section 78o(b) of this title;

(B)

has been convicted of any offense specified in subparagraph (B) of such paragraph (4) within 10 years of the commencement of the proceedings under this subsection;

(C)

is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4);

(D)

is subject to an order or a final order specified in subparagraph (F) or (H), respectively, of such paragraph (4); or

(E)

has been found by a foreign financial regulatory authority to have committed or omitted any act, or violated any foreign statute or regulation, enumerated in subparagraph (G) of such paragraph (4).

(4)

Unlawful conduct

It shall be unlawful—

(A)

for any person as to whom an order under paragraph (3) is in effect, without the consent of the Commission, willfully to become, or to be, associated with a security-based swap dealer or major security-based swap participant in contravention of such order; or

(B)

for any security-based swap dealer or major security-based swap participant to permit such a person, without the consent of the Commission, to become or remain a person associated with the security-based swap dealer or major security-based swap participant in contravention of such order, if such security-based swap dealer or major security-based swap participant knew, or in the exercise of reasonable care should have known, of such order.

(June 6, 1934, ch. 404, title I, § 15F, as added Pub. L. 111–203, title VII, § 764(a), July 21, 2010, 124 Stat. 1784; amended Pub. L. 114–1, title III, § 302(b), Jan. 12, 2015, 129 Stat. 28.)

cite as: 15 USC 78o-10