U.S. TREASURY OFFICIAL'S REMARKS ON WALL STREET REFORM

FROM:  U.S. DEPARTMENT OF THE TREASURY
Wall Street Reform for U.S. Department of the Treasury
As prepared for delivery
NEW YORK – Good afternoon.  It is a privilege to address the International Section of the American Bar Association, and to be speaking about international regulatory reform. The subject matter is particularly timely given that the world’s finance ministers will gather in Washington, D.C. for the G-20 this weekend.

We have learned from recent events, including the financial crisis, that financial systems and markets around the world are more integrated than ever.  Therefore, financial reforms around the globe must be consistent and convergent.

I will touch on three key priorities that were agreed upon by the G-20 – capital, resolution, and OTC derivatives – as well as insurance regulation.
We are transitioning now from regulatory design to implementation.  We must acknowledge that the task is both difficult and complex. We must work together through the G-20 and the Financial Stability Board to make the new rules effective. We all share a common interest in a global financial system that is safe and resilient, and that supports growth.

The Importance of Reform
Let me begin by retreading familiar ground: the financial crisis revealed that the risks facing our system can be correlated and crosscutting, and that they can affect multiple firms, markets, and countries simultaneously. The crisis laid bare the fundamental weaknesses of the previous financial regulatory infrastructure.
To preserve financial stability, it became essential to establish a regulatory structure that could properly assess the financial system as a whole, not simply its component parts – a regulatory structure in which the failure of one firm, or problems in one corner of the system, would not risk bringing down the entire financial system.  It was important to establish a modern regulatory framework that could keep pace with financial sector innovations, restore market discipline, and safeguard financial stability in both the United States and abroad.  The United States has played a leading role in this global financial reform by enacting the Dodd-Frank Act.

Some have argued that these new rules and standards put U.S. financial firms at a competitive disadvantage.  While we must always work towards having a level competitive playing field, I believe such arguments are misplaced.
First, by moving quickly, we in the United States have been able to lead from a position of strength in setting the international reform agenda.

Second, there is already evidence that our actions – both the immediate response to the crisis and permanent reforms under the Dodd-Frank Act – have bolstered the recovery of the U.S. financial system.  Bank balance sheets are stronger. Tier 1 common equity at large bank holding companies has increased by more than 70 percent or by $560 billion since the first quarter of 2009. Additionally, at the four largest bank holding companies, for example, reliance on short-term wholesale financial debt has decreased from a peak of 36 percent of total assets in 2007 to 20 percent at the end of 2011. The firms’ liquidity positions are more robust and their funding sources are more reliable. Firms have significantly reduced leverage. Recent stress tests showed that the bank holding companies are better able to withstand significant shocks.

Third, I believe that consumers, investors, and businesses feel more secure when they deal with financial institutions that are well-regulated and transparent, because these attributes engender trust. Trust is essential for the financial system to perform its most basic functions, including credit intermediation. For many years, investors from all over the world have trusted the U.S. financial system. Regulation that is both strong and sensible is essential to continue that trust.

Over the past three years, we have made substantial progress in restoring this trust to our financial system and thereby improving financial stability. Long-term economic growth and credit intermediation are only sustainable under a model in which there is confidence in financial stability.

International Coordination
All of this being said, it is nevertheless important to remember that financial systems are interconnected and that risks both transcend and migrate across national borders. Therefore, we must work towards building a system where there is broad global agreement on the basic rules of the road.

Global coordination is important not only for maintaining a level playing field, but also for promoting financial stability.  We can ill afford the risk of regulatory arbitrage.  If riskier activities migrate unchecked to jurisdictions with inadequate rules and supervision, the threats that will emerge will have implications not just for the host country, but for the global financial system. The financial crisis exposed the failure of weak regulation.

Europe has taken important steps toward reform.  The EU is working through its most extensive financial services reform.   It has proposed or adopted around thirty reform measures, including almost all of the key measures agreed to by the G-20.  The United States and the EU are aligned on the fundamental goals of regulatory reform, and are united by a shared view that it is necessary to complete at an international level the work that is underway.  Treasury and U.S. regulatory agencies have worked closely with our counterparts in the European Commission and the European Supervisory Agencies to align our regulations more closely.

It is unlikely that we and our European counterparts will attain perfect alignment.  But most of the differences between us are technical, not matters of principle.  While we must work diligently to resolve our technical differences, we should not let them overshadow our shared commitment to reform. We must also see to it that other regions follow through on implementing reforms, particularly Asia, given the importance of financial centers like Hong Kong, Singapore, and Tokyo. The global financial system will continue to strengthen as a result of our efforts. Backtracking on reforms is not an option.

G-20 and the Joint Reform Agenda
The G-20 has been, and will continue to be, a key vehicle for coordinating our reform efforts. Since the first meetings of the G-20, and especially since the Pittsburgh meetings during the height of the financial crisis in 2009, the Group has worked to increase the strength and effectiveness of the international regulatory framework through a comprehensive agenda for reform. This agenda has been reaffirmed and further developed at each subsequent Summit.  The Financial Stability Forum, which was expanded and strengthened as the Financial Stability Board (FSB) in 2009, has also played a key role in this process, with support from the global standard-setting bodies.

This year in the G-20, the United States is emphasizing progress on implementation in three key areas: capital, resolution, and OTC derivatives.  Let me now turn to discussing these three priorities as well as international coordination around insurance, which will also be an area of focus in the coming year.

Capital
The crisis showed that financial institutions were not sufficiently capitalized to withstand significant market pressures.  To maintain financial stability, taxpayers in countries across the globe had to provide capital support to financial institutions in order to prevent their failure.  There was little question that, going forward, banks needed to be more resilient, with better quality capital buffers.  

The international regulatory community acted with dispatch and urgency to achieve consensus on Basel 2.5 and Basel III capital standards.  The new Basel capital standards provide a uniform definition of capital across jurisdictions, and it requires banks to hold significantly more and higher-quality capital.  The reforms to the Basel Capital Standards also establish a mandatory leverage ratio and a liquidity coverage ratio.
More work remains with respect to the Basel Capital Standards.  International agreement on standards must be followed with implementation by G-20 members.  Moreover, important debates continue around issues such as liquidity run-off ratios and measurement of capital deductions. The Basel Committee is now working toward more consistent measurement of risk-weighted assets across jurisdictions.

While these points are relatively technical, it is important that the new rules be consistent not only in principle, but also in practice. Consistent cross-border application of capital standards is important to maintaining a level playing field.

Resolution
Strengthening cross-border resolution regimes is complicated.  But it is a critically important topic.

The U.S. experience with Lehman Brothers showed the potentially devastating consequences to financial stability of the disorderly bankruptcy of a financial firm. Thus, the Dodd-Frank Act provides for orderly resolution of financial companies, including non-bank financial institutions. The FDIC and Federal Reserve have already adopted a number of rules pursuant to these new authorities, including a “living wills” rule that requires large bank holding companies and designated nonbank financial companies to prepare resolution plans.  The largest bank holding companies will submit the first living wills in July.
The goal of international convergence was furthered this year when the G-20 endorsed the “Key Attributes of Effective Resolution Regimes for Financial Institutions.”   This new international standard addresses such critical issues as the scope and independence of the resolution authority, the essential powers and authorities that a resolution authority must possess, and how jurisdictions can facilitate cross-border cooperation in resolutions of significant financial institutions. The Key Attributes provide guidelines for how jurisdictions should develop recovery and resolution plans for specific institutions and for assessing the resolvability of their institutions.  This new international standard also sets forth the elements that countries should include in their resolution regimes while avoiding severe systemic consequences or taxpayer loss.

Therefore, much progress has already been made and even more will be completed by the end of this year: cross-border crisis management groups for the largest firms have been established, additional cross-border cooperation agreements will be put in place, and recovery and resolution plans are being developed.

Derivatives
The crisis also showed that we did not have a sufficient understanding of derivatives, which are an important means of interconnection between firms.  The flaws attendant to this area of financial transactions were many: poor access to useful data such that, at critical times, neither supervisors nor counterparties knew who owed what to whom; poor risk management such that firms were not able to satisfy their contractual obligations with respect to collateral; and a generally fragmented and opaque market. It is common ground that the lack of oversight in the derivatives markets exacerbated the financial crisis.
The Dodd-Frank Act creates a comprehensive framework of regulation for the OTC derivatives markets.  The elements of this framework include regulation of dealers, mandatory clearing, trading, and transparency.  The framework established under the Dodd-Frank Act is consistent with that of the G-20.  The CFTC and SEC are well into their rule-making process.  Once again, the United States and the EU have closely cooperated in this area, and have adopted parallel approaches to important issues such as central clearing, trading platforms, and reporting to trade repositories.

While the reforms set forth a framework for on-exchange-traded derivatives, it is also important for us to make progress on establishing a global regime for margin for bespoke, un-cleared derivatives transactions.  Both the United States and the EU support international work on global margin standards for trades that are not cleared through a central counterparty. Margin requirements are critical to promoting the safety and soundness of the dealers, and thereby lower risk in the financial system.
While we have made some progress, there is still much work to be done on derivatives, including completing the implementation efforts and meeting agreed G-20 timetables.

Insurance
Finally, I would like to turn to insurance regulation.  Important strides have been made in this area. The Dodd-Frank Act created and placed within the Treasury Department the Federal Insurance Office (FIO). While FIO is not a regulator, it has broad responsibilities to monitor all aspects of the insurance industry and is the first federal office in this sector. Among its duties, FIO is charged with coordinating federal efforts and developing federal policy on prudential aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors, or IAIS. Notably, FIO recently joined the Executive Committee of the IAIS.

FIO’s establishment coincides with the rapid internationalization of the insurance sector and work ongoing in various international regulatory bodies that will affect U.S.-based companies operating around the world. FIO’s international priorities include the IAIS initiative to create a common framework for the supervision of internationally active insurance groups, or ComFrame. FIO is also engaged in the IAIS work stream to develop a methodology that will identify globally significant insurance institutions, an assignment given to the IAIS by the Financial Stability Board. Finally, FIO is leading an insurance dialogue between the United States and the EU that aims to establish a platform for insurers based on both sides of the Atlantic to compete fairly and on a level playing field.

Conclusion
We must continue to work with our partners in the G-20 and the Financial Stability Board to ensure a consistent international financial reform agenda.  It is not enough to mitigate risk within the United States.  Reform must be global in nature.

But, financial reform cannot just respond to events of the past.  It must be forward-looking and it must help lay the foundations for sustainable growth.  Financial reform, embodied by responsible and robust regulation, is critical to establishing and maintaining confidence.  Confidence is critical for long-term financial stability and growth.
Our past experience confirms our current judgment.  In the decades following the Great Depression, the United States set the highest standards for disclosure and investor protection, the strongest protections for depositors, and sophisticated market rules. We did not lower our standards even when others might have.  Financial regulation became a source of strength for our financial system and led to a period of significant growth and prosperity.

Today, as our predecessors did in the wake of the Great Depression, we also have the opportunity to restore trust in the global financial system through a smart regulatory framework that could support sustainable economic expansion.
Thank you.

ICI 2011 CLOSED-END FUND CONFERENCE REMARKS BY EILEEN ROMINGER

The following excerpt is from the SEC website: Eileen Rominger Director, Division of Investment Management November 17, 2011 “Good afternoon, and thank you for inviting me to speak here today. Let me make the usual disclosure that my remarks represent my own views and not necessarily the views of the Commission, the individual Commissioners or my colleagues on the SEC staff. We have just listened to the panel on “How Closed-End Funds Fit in Today’s Markets.” I am reminded that the last time that an SEC Division of Investment Management Director spoke about closed-end funds at this conference was in October 2007. A panel on the same topic back then probably would have sounded somewhat different. 2007 was in many ways a peak year for closed-end funds -- their assets were about four times what they are today; they issued more than three times worth of new shares in 2007 than they did last year; and 2007 saw the biggest-ever closed-end fund IPO of $5 billion dollars.2 Year 2008 was not kind to the closed-end fund industry. During the financial crisis, the average closed-end fund discount to NAV hit record levels -- it was estimated to be more than 15%, with 443 closed-end funds trading at double-digit discounts.3 Yet perhaps the financial crisis will be remembered by the closed-end fund industry primarily as the event that, for the first time in history, froze the market for auction-rate preferred shares, or ARPs, one of the funds’ key sources of leverage. Three years after the financial crisis, it is not uncommon to read that closed-end funds still are “suffering a bad rap,” that they “lack fans,” that investors are “shying away” from their IPOs, or that their investors are still “spooked.”4 And then there are the various reminders that the ever-growing ETFs and ETNs are muscling in on some of the closed-end funds’ traditional investment territory. It is probably fair to say that in 2011, closed-end funds are still looking to regain their footing in the post-financial crisis investment environment. Some significant strides have been made -- I was glad to find out that, as of the end of September of this year, over 77% percent of ARPs that were outstanding when the markets froze in 2008, have been redeemed as funds found other comparable sources of financing or decided to de-leverage.5 Overall, these are challenging times for investors. Stresses on the global economic order have led to sharp market volatility increases, accompanied by redemptions from equity mutual funds. During periods of stress -- more than ever -- I believe that it is important that funds do all they can to maintain high standards. Only by doing so will they continue to earn and retain the confidence of investors. One area in which standards should be held high is that of informing and educating investors. For example, leverage is often a difficult issue for investors to understand and put in the right perspective. And not only for investors. For closed-end funds themselves, some leverage, such as bank debt or issuing preferred stock, may be straightforward to quantify and explain. Other leverage, such as tender option bonds or reverse repos, may be more complex and variable. In the last few years, as many closed-end funds may have shifted from using ARPs to other forms of leverage, including derivatives, they may be facing new challenges in giving their investors an understandable picture of their leverage profiles. If leverage materially affected a fund’s performance during its fiscal year, I believe the fund should discuss this factor in its annual report. About a year ago, my Division staff sent a letter to the ICI providing its most recent observations about derivatives-related disclosures by investment companies in registration statements and shareholder reports.6 The letter noted, for example, that some funds that appear to have significant derivatives exposure in their financial statements, have limited or no discussion in their annual reports of the effect of those derivatives on the funds’ performance. Even apart from the regulatory requirements, leaving investors in the dark about the role that leverage plays in the management and performance of their portfolios cannot be good for the closed-end fund business. An investor reading a fund’s annual report should not have to dig through the footnotes in the financial statements to understand the material impact that derivatives -- or leverage generally -- may have had on the fund’s performance. Unfortunately, some closed-end fund investors are still in that position today. At the other end of the spectrum, many closed-end funds do an excellent job of communicating to their investors on this topic. These funds’ annual reports speak pointedly and clearly about the role of leverage in their performance. They manage to convey to investors what is important about their funds’ often complex leverage strategies in a simplified but focused and accurate manner. I believe that these investors are well served. The complexities of how best to inform and educate investors about leverage in general, and derivatives in particular, are well known to us at the Commission. My Division is beginning to analyze the comments that have come in on the Concept Release on derivatives, which the Commission issued at the end of August.7 The Concept Release did not speak in detail about disclosure issues, but it did devote significant attention to the treatment of derivatives under the leverage, portfolio diversification and concentration requirements. These are all issues that go to providing investors a complete and accurate picture of their fund. The Concept Release also broadly invited comments on any derivatives-related issues that commenters felt were relevant to the use of derivatives by funds. We welcome and appreciate your views about derivatives-related issues from the closed-end fund community’s point of view. As the markets work through this challenging period, I hope that the closed-end fund industry as a whole makes the commitment and re-doubles efforts to provide investors with appropriate disclosure about leverage and derivatives. Take a fresh look at your funds’ shareholder reports and websites, because these are the places where your investors, as a practical matter, look for information about their funds. Efforts spent on these channels of communication will not only benefit your investors, but will be good for business, too. Speaking of what is perceived as “good for business,” a Morningstar article recently observed that “many closed-end funds live and die by their distributions.”8 In today’s environment of historically low interest rates, many closed-end funds are finding managed distribution policies to be magnets for yield-seeking investors. Couple that with the low cost of leverage, and many closed-end funds may be tempted to further increase the size of their funds’ distributions. Last year, for example, there were 566 announced distribution increases, compared to 187 distribution reductions, and the average change in distribution was an increase of 6.6%.9 Of course, managed distribution policies have been around for as long as closed-end funds themselves, with mixed results and some historical lessons. The 2007 speech to this audience by my predecessor in the Division, cautioned about several issues: the importance of timely disclosure to investors regarding the sources of fund distributions; making clear to investors the extent of a fund’s ability to sustain its current distributions; the need for monitoring of distribution rates by fund managers and directors; and the appropriateness of continuing with a distribution policy.10 It was a timely caution. The market events of 2008 -- combined with the effects of the tax rules -- led a number of closed-end funds to reduce their distribution rates or discontinue their managed distribution policies altogether. These developments made real the need for good disclosure and investor understanding of managed distributions. As we once again face a market under stress in 2011, and as investors seek refuge in yield, it is critically important to conduct business in a way that does not undermine the protection of investors. A growing segment of our population is approaching retirement and seeking yield-generating investments. It would be great if we could agree to raise the bar for informing and educating investors. And of course we all know that a few “bad apples” can tarnish an entire industry. When certain closed-end funds appear to have distribution rates that are significantly higher than their portfolios’ average annual total returns,11 it suggests an unsustainable posture that may end badly for shareholders. We should all worry when Morningstar observes that closed-end funds with high distribution rates -- particularly those that provide the least information about the sustainability of their distributions -- tend to trade at the highest premiums and are “market successes.”12 I think we would all agree that there is no “market success” when it concerns poorly informed investors on the issue of closed-end fund distributions. One cannot help but remember that closed-end funds have known their share of market “bubbles.” In fact, closed-end funds as we know them today arose out of the ashes of the infamous 1929 closed-end funds bubble. It was a time of spectacular growth for leveraged closed-end funds and premiums that reached the sky. In 1929, the premiums averaged 50%, and the hottest new closed-end fund issues sometimes traded at 200% of NAV.13 It was also a time marked by a lack of transparency that bordered on secrecy. After the great crash of 1929, one of the key ways in which closed-end funds sought to resurrect the industry was through a coordinated effort toward greater transparency to inform and educate the investing public about themselves. And the focus of that effort was not on pages and pages of “boilerplate,” but on actually getting across to an investor what sort of thing he or she would be getting when buying a closed-end fund. That real effort at transparency -- and the substantive regulation in the form of the Investment Company Act -- is what enables us to be here today to discuss the state of the closed-end fund industry in the year 2011. And yet, we are still talking about transparency and distribution policies. Reputation is far more easily lost than regained, so I encourage all to disclose clearly and completely, and to set distribution policies that will manage, and meet, investor expectations appropriately over the long-term. I’m happy to have had the chance to speak with you today. Thank you for your time.”

SEC PROPOSES RULES FOR SECURITY-BASED SWAPS

The following excerpt fro the SEC website discusses some of the proposed rules for security based swaps. It is a complicated document which has proposals to regulate some extremely complicated securities transactions.

"Washington, D.C., Feb. 2, 2011 — The Securities and Exchange Commission today voted unanimously to propose rules defining security-based swap execution facilities (SEFs) and establishing their registration requirements, as well as their duties and core principles.

The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to implement a regulatory framework for security-based swaps, which currently trade exclusively in the over-the-counter markets with little transparency or oversight.

The Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets, and therefore created security-based SEFs as a new category of market intended to provide more transparency and reduce systemic risk.

"Our objective here is to provide a framework that allows the security-based swap market to continue to develop in a more transparent, efficient, and competitive manner," said SEC Chairman Mary L. Schapiro. "This is an important and complex undertaking that adds a significant new component to the regulatory framework for over-the-counter derivatives."

The Commission's proposed rules:

Interpret the definition of "security-based SEFs" as set forth in Dodd-Frank.
Set out the registration requirements for security-based SEFs.
Implement the 14 core principles for security-based SEFs that the legislation outlined.
Establish the process for security-based SEFs to file rule changes and new products with the SEC.
Exempt security-based SEFs from the definition of "exchange" and from most regulation as a broker.
Public comments on the rule proposal should be received by the Commission by April 4, 2011.


FACT SHEET
Security-Based Swap Execution Facilities
Background
Division of Authority
The Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets. In the process, it divided regulatory authority over swaps between the SEC and the Commodity Futures Trading Commission (CFTC).

Among other things, Title VII of the Act authorizes the Commission to regulate "security-based" swaps and directs it to engage in rulemaking to shape the regulatory framework for such products.

Security-Based Swaps and Derivatives
A derivative is a financial instrument or contract whose value is 'derived' from an underlying asset, such as a commodity, bond or equity security. The instruments provide a mechanism for the transfer of market risk or credit risk between two counterparties. Derivatives are incredibly flexible products that can be engineered to achieve almost any financial purpose.

For instance, a derivative can be used by two parties who have a differing view on whether a particular financial asset price will go up or down or whether an event will happen in the future. With derivatives, market participants can track or replicate the economics of holding or shorting an underlying asset, such as a security, thereby enabling participants to gain a desired market or credit exposure without actually holding the underlying asset.

A swap is a type of derivative contract that is traded in the over-the-counter market. One type of swap is a "security-based swap", over which the SEC has authority. Such swaps are broadly defined as swaps based on (1) a single security, (2) a loan, (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index.

As an example, in a credit default swap transaction, the party who is seeking to hedge against a loss from a particular credit event, say the default of a bond, is referred to as the credit protection buyer. The credit protection buyer will receive a payment to compensate for its loss in the event that the default occurs. A credit protection seller is the counter-party.

The current market for security-based swaps, which trade over-the-counter, is opaque, with swap dealers acting as liquidity providers, and institutional investors and investment managers acting as liquidity takers. Compared to the exchange-traded markets, there is little pre-trade transparency (the ability to see trading interest prior to a trade being executed) or post-trade transparency (the ability to see transaction information after a trade is executed).

Security-Based Swap Execution Facilities
To ensure greater transparency in the security-based swaps market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets.

As such, Dodd-Frank requires security-based swap transactions that are required to be cleared through a clearing agency to be executed on an exchange or on a new trading system called a security-based swap execution facility. The Dodd-Frank Act, however, states that the transaction need not be executed on a security-based SEF or exchange if no security-based SEF or exchange makes the security-based swap "available to trade."

This newly created entity is defined under the Dodd-Frank Act in relevant part as "a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. . . ."

The Core Principles
The Dodd-Frank Act further requires security-based SEFs to be registered with the Commission and specifies that such a registered security-based SEF, among other things, must comply with 14 core principles.

The core principles would require these security-based SEFs to:

Comply with the core principles and any requirement the Commission may impose.

Establish and enforce rules governing, among other things, the terms and conditions of security-based swaps traded on their markets; any limitation on access to the facility; trading, trade processing and participation; and the operation of the facility.

Permit trading only in security-based swaps that are not readily susceptible to manipulation.

Establish rules for entering, executing and processing trades and to monitor trading to prevent manipulation, price distortion, and disruptions through surveillance, including real-time trade monitoring and trade reconstructions.

Have systems to capture information necessary to carry out its regulatory responsibilities and share the collected information with the Commission upon request.

Have rules and procedures to ensure the financial integrity of security-based swaps entered on or through the facility, including the clearance and settlement of security-based swaps.

Have rules allowing it to exercise emergency authority, in consultation with the Commission, including the authority to suspend or curtail trading or liquidate or transfer open positions in any security-based swap.

Make public post-trade information (including price, trading volume, and other trading data) in a timely manner to the extent prescribed by the Commission.

Maintain records of activity relating to the facility's business, including a complete audit, for a period of five years and to report such information to the Commission, upon request.

Not take any action that imposes any material anticompetitive burden on trading or clearing.

Have rules designed to minimize and resolve conflicts of interest.

Have sufficient financial, operational, and managerial resources to conduct its operations and fulfill its regulatory responsibilities.

Establish a risk analysis and oversight program to identify and minimize sources of operational risk and to establish emergency procedures, backup facilities, and a disaster recovery plan, and to maintain such efforts, including through periodic tests of such resources.

Have a chief compliance officer that performs certain duties relating to the oversight and compliance monitoring of the security-based SEF and that submits annual compliance and financial reports to the Commission.

The Proposal
The Commission proposed a series of rules related to security-based SEFs.

Attributes of a Security-Based SEF
The Commission proposed an interpretation of the definition of a security-based SEF. Under its proposed interpretation, a security-based SEF would be a system or platform that allows more than one participant to interact with the trading interest of more than one other participant on the system or platform.

Various types of trading platforms potentially could meet the proposed interpretation. For example, a limit order book system (i.e., a system or platform that allows a participant to submit executable bids and offers for display to all other participants) could meet the proposed interpretation.

Also, the proposed interpretation would accommodate a "request for quote" system that provides a participant with the ability to send a single request for a quote to all participants providing liquidity on that system, or to choose to send the request to fewer than all such participants.

The security-based SEF would not be able to limit the number of liquidity providing participants from whom a quote-requesting participant could request a quote on the SEF. However, the security-based SEF would be able to let the quote-requesting participant choose to send its request for a quote to less than all the liquidity-providing participants.

The security-based SEF also would have to provide a functionality that allows any participant the ability to make and display executable bids and offers accessible to all other participants on the security-based SEF, if the participant chooses to do so. Also, the security-based SEF would have to create and disseminate composite indicative quotes for all swaps that trade on the security-based SEF to all participants.

The Requirements for Registering SEFs
Under the proposed rules, security-based SEFs would be required to register with the Commission by filing a form, Form SB SEF. The SEF also would be required to update its filing when the information becomes inaccurate and file an amended form annually.

The proposed rules also would require that a security-based SEF:

File with the Commission proposed changes to its rules as well as the security-based swaps that it intends to trade.

Have rules to ensure compliance with the core principles outlined in the Dodd-Frank Act.

Have rules regarding access to, and the financial integrity of transactions on, the security-based SEF.

Put in place rules governing the procedures for trading on the security-based SEF.

Ensure the integrity of security-based SEF systems by having policies and procedures reasonably designed to ensure that its systems have adequate levels of capacity, resiliency, and security.

Make and keep certain books and records.

Have adequate resources to operate as a security-based SEF.

In addition, the proposal would exempt a security-based SEF from the definition of exchange and from most regulations as a broker.

Previous Related Rulemaking
This proposal coincides with rules the SEC proposed in December that would set out the way in which clearing agencies provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. This information is designed to aid the SEC in determining whether such security-based swaps should be required to be cleared.

In addition, under the Dodd-Frank Act, the SEC has engaged in several additional rulemakings related to the derivatives market:

Defining Security-Based Swap Terms: Proposed jointly with the Commodity Futures Trading Commission new rules that would further define a series of terms related to the security-based swaps market, including "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant."

Security-Based Swap Reporting: Proposed new rules entailing how security-based swap transactions should be reported and publicly disseminated.

Security-Based Swap Repositories: Proposed rules regarding the registration and regulation of security-based swap data repositories.

Security-Based Swap Fraud: Proposed a new rule to help prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap as well as in connection with ongoing payments and deliveries under a security-based swap.

Security-Based Swap Conflicts: Proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.

Reporting of Pre-Enactment Security-Based Swaps: Adopted an interim rule requiring certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act. This rule applies only to such swaps whose terms had not expired as of July 21.

Confirmation of Transactions: Proposed a rule governing the way in which certain security-based swap transactions are acknowledged and verified by the parties who enter into them.

What's Next
The proposal seeks public comment by April 4, 2011, on a broad range of issues relating to the proposed interpretation, exemptions, rules and form relating to security-based SEFs, including the costs and benefits associated with the proposal. After careful review of comments, the Commission will consider whether to adopt the proposal or modify it."

Hopefully, Security Based Swaps will become less of a vehicle for gamblers and more of a vehicle to help manage risk. Of course it would be nice if you could go long the stock market and make money holding a stock for decades like our grandfathers.