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SEC unveils capital, margin rules for swap dealers

Luis Aguilar

The Securities and Exchange Commission unveiled proposed rules this week that require swap dealers to hold additional capital, post collateral against risky trades and work towards protecting customers’ money.

Under the 2010 Dodd-Frank Act, the SEC is required to issue rules on capital, margin and segregation requirements for swap dealers and major swap participants that are separate from but coordinated with rules issued by the Commodity Futures Trading Commission last year, Compliance Week reports.

The new rules would apply to firms like Morgan Stanley and Goldman Sachs, as well as firms that trade heavily in over-the-counter derivatives.

SEC Commissioner Luis Aguilar said that the commission’s proposal will alter the economics of entering into uncleared, security-based swaps, though he also stressed the importance of the rules.

The SEC lags behind compared to other regulators in its progress on capital and margin requirements. The commission’s proposed capital rule is largely based on rules already in place that govern securities broker-dealers.

Under the proposal, swap dealing brokerages and stand-alone swap dealers would be required to hold a minimum of $20 million in net capital in addition to eight percent of the total collected margin.

The eight percent margin requirement is intended to ensure that those firms that participate heavily in derivatives trading will increase capital in proportion to the size of the business and their risks, Compliance Week reports.

Additionally, the SEC proposal attempts to update net capital rules for America’s biggest brokerages that rely on internal modeling to comply with net capital rules by increasing the fixed minimum requirement from $500 million to $1 billion.

The proposal further spares firms designated as “end-users,” such as some asset managers, that rely on swaps to hedge risk against posting margin. Instead, the rules target those trades between large swap traders or dealers, according to Compliance Week.

The SEC also laid out steps that swap dealers would be required to take in order to protect their customers’ money. Dealers would be responsible for controlling customers’ fully paid and excess margin securities in addition to maintaining an account with reserve cash that equals the net cash owed to the customers.

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