Impact Of The New SEC Security-Based Swap Rules On Broker-Dealer Regulatory Reporting – There Is No De Minimis… For Financial Responsibility Rules

A Single Swap Transaction Is All It Takes

While there is a de minimis exemption for registration as a security-based swap dealer (SBSD), there is none for complying with certain financial responsibility rules.  Therefore, for a broker-dealer not registered as an SBSD, having only one security-based swap (SBS) transaction on its books can trigger the SEC’s new security-based swap rules. That is why many firms are paying particularly close attention during the countdown to October 2021 when the new rules take effect.

Preparation Is Not A Trivial Exercise

To ensure compliance with segregation, capital, margin, recordkeeping, and regulatory reporting requirements by October 2021, firms should begin to prepare now. Broker-dealers, SBSDs, and MSBSPs (major security-based swap participants) must identify SBS activities and the impact of those activities on their books and records, decide on a systematic compliance approach, and build and effect the desired change.

Need To Monitor Regulatory Changes

For non-SBSD broker-dealers, a single SBS transaction can trigger the SEC’s new security-based swap rules.
Part of a firm’s preparation is monitoring what other regulators will do to harmonize with the SEC’s new rule amendments. The industry will be carefully watching the CFTC’s and FINRA’s progress. FINRA, for example, is embarking on projects to decide how to modify its rules and will be inviting commentary and questions as it works through the revision process. In the meantime, its Rule 4240 on margin for credit default swaps (CDS) and Rule 0180 on the application of rules to security-based swaps still stand. In any case, there will be changes.

Unfamiliar Reporting Territory

All the aforementioned entity types are impacted by the new security-based swap rules, but where the rubber meets the road is for the standalone (non-swap-dealer) broker-dealers. Although not registered as SBSDs, these firms need to be concerned with the new rules for handling single name CDS, CDSX, IRS, and TRS. Some of the new requirements are encompassed in the following:

  • Rule 15c3-1
  • Rule 15c3-3
  • FOCUS Part II new forms
  • Rules 17a-3 and 17a-4 for recordkeeping and record retention
  • Rule 17a-5 reporting

Regardless of the type of security-based swap transactions on their books, standalone broker-dealers will have to meet a slew of new compliance requirements that can be especially onerous if the firm collects initial margin. For many, it will trigger first-time compliance with the Customer Protection Rule, SEC 15c3-3.

Compliance Begins Now… In Advance Of October 2021

In the meantime, regulatory expectation is that broker-dealers will conform to the intention of the new security-based swap rules now, months ahead of the inception date of October 2021. Because there is no de minimis threshold for financial responsibility rules, all firms must put SBS rule compliance preparation on the front burner.

Get Ready For The New Security-Based Swap Rules With AxiomSL’s Broker-Dealers Solutions

Risk and Regulatory Reporting Solutions for Broker-Dealers Powered by BrokerViewAxiomSL’s automated and transparent ecosystem for U.S. broker-dealers, depicted to the right, enables trusted net capital and customer protection formula calculations and related regulatory reporting. Based upon the new security-based swap rules, AxiomSL is completing the required updates to its SEC Rule 15c3-1 and SEC Rule 15c3-3 solutions and will finalize changes to the FOCUS report when FINRA releases its final version.

To get a handle on the countdown to the new security-based swap rules reporting deadline, contact us here.

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