New Rules for Swap Dealers

The Securities and Exchange Commission (SEC) is proposing new rules for swap dealers and their clients.  The SEC, which was asleep during the credit crisis of 2008, is trying to oversee a swap business of $600 trillion in notional trades.  The transactions that will apply the new rules are security-based swaps and some credit default swaps.  The former are swaps that are derived from the performance of a stock, bond or index.  The latter are insurance against a default for a corporation or government's bonds.  Some of the rules are:

• The security-based swap dealers would have to act in the best interests of the state or local government or pension fund, recommending suitable swaps.  
• They would have to disclose information about the trade's risks and any conflicts of interest.
• They would have to verify that their customer is financially sound.  
• The dealers would also have to know that a qualified independent adviser was representing the fund for a transaction.  
• They would have to build a compliance department for oversight.

Swap execution facilities are being set up by thirty to forty dealers such as Bloomberg and Tradeweb.  Banks, hedge funds, insurance companies and other institutional investors are prepared to trade on these facilities.  They are waiting for the SEC rules to be approved and finalized.

Here are the sources for this article:

• New York Time Dealbook
• Washington Post
• Bondbuyer.com
• Wall Street Journal