What is a Broker-Dealer? - Davis Polk & Wardwell

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§ 1A:4.4 BROKER-DEALER REGULATION (II) whose outstanding security-based swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or (III) that is a financial entity that— (aa) is highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency; and (bb) maintains a substantial position in outstanding security-based swaps in any major security-based swap category, as such categories are determined by the Commission. 306 As with SBS dealers, an entity may be designated a SBS MSP for one or more categories of SBS without being classified as a SBS MSP for all classes of SBS. 307 Dodd-Frank requires the SEC to adopt rules, within one year of enactment of the Act (July 21, 2011), providing for the registration of SBS Dealers and SBS MSPs. 308 These registration requirements apply regardless of whether the person is also registered with the CFTC as a Swap Dealer or MSP. 309 Upon registration as a SBS Dealer or SBS MSP, an entity will become subject to a number of regulatory requirements, including: (i) clearing and exchange trading of formerly over-the-counter derivatives, (ii) trade reporting, (iii) minimum capital and margin requirements, (iv) segregation of customers’ collateral, (v) new business conduct standards, and (vi) position limits. Certain of these requirements also apply to those entities that trade in SBS but are not themselves SBS dealers or MSPs. The CFTC’s regime for regulation of swap dealers and MSPs is largely, though not entirely, parallel. There is no exception from the definition of “SBS dealer” or “SBS MSP,” or the registration requirements for SBS dealers or SBS MSPs, 306. Exchange Act § 3(a)(67)(A), as amended by Dodd-Frank § 761(a). 307. Exchange Act § 3(a)(67)(C), as amended by Dodd-Frank § 761(a). 308. Exchange Act § 15F(d), as amended by Dodd-Frank § 764(a). 309. Exchange Act § 15F(c), as amended by Dodd-Frank § 764(a). 1A–72
What Is a Broker-Dealer? § 1A:4.4 for banks. 310 In addition, there is no concept in Dodd-Frank of a regime parallel to Rule 15a-6 whereby foreign persons can avoid registration as a SBS dealer or SBS MSP through intermediation by a registered SBS dealer or SBS MSP. 311 As noted above, Dodd-Frank introduces a regime for the clearing and exchange trading of certain swaps and SBS. The exchange trading requirement may be satisfied by executing a trade on a SBS SEF. 312 SBS SEF is defined 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, including any trading facility, that— (A) facilitates the execution of security-based swaps between persons; and (B) is not a national securities exchange. 313 To be registered and maintain registration, a SBS SEF must comply with certain core principles and other SEC requirements. These core principles include, among others, (i) establishing and enforcing compliance; (ii) only trading SBS not readily susceptible to manipulation and monitoring trading; (iii) establishing and enforcing rules that will allow the facility to obtain information, ensure financial integrity of the traded SBS and exercise emergency authority; (iv) publishing trading information and maintaining required records; (v) establishing conflicts of interests rules; (vi) having adequate financial, operational and managerial resources; and (vii) establishing and maintaining a program of risk analysis and oversight and designating a chief compliance officer. 314 310. For a discussion of exclusions from the definition of “broker” and “dealer” for banks, see infra section 1A:7.4. 311. For a discussion of Rule 15a-6, see infra section 1A:7.2. 312. Exchange Act § 3C(h), as amended by Dodd-Frank § 763(a). 313. Exchange Act § 3(a)(77), as amended by Dodd-Frank § 761(a). 314. Exchange Act § 3D(d), as amended by Dodd-Frank § 763(c). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–73
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Chapter 1A What Is a Broker-Dealer?
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What is a Broker-Dealer? - Davis Polk & Wardwell

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