WASHINGTON (CN) - The Securities and Exchange Commission released a regulatory "roadmap" this week outlining the order of implementation for rules it has adopted to regulate securities-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
     The act split regulation of swaps between the SEC and the Commodities Futures Trading Commission. The SEC was apportioned regulation of swaps based on the performance of securities, while the CFTC regulates all other swaps except mixed swaps based on securities and the performance of some other index like a commodity.
     Over the last two years the SEC has adopted new rules in 12 subject areas mandated by Dodd-Frank, ranging from rules prohibiting fraud and manipulation of swaps to the mandatory registration of swap dealers and major swap market participants.
     To prevent disruption in the securities-based swaps market that might arise from having all of the rules go into effect at once, the SEC has granted temporary exemptions to many of the new rules or delayed compliance deadlines pending completion of the complete Dodd-Frank rulemaking cycle.
     The roadmap subdivides the 12 areas of rule making it has already completed into five groups for implementation based on their functionality or the primacy of their adoption before other functional areas can be adopted.
     The first group of rules the SEC said should be implemented are those that define the terms used by all of the others and set the scope of the SEC's regulatory reach.
     As a result, rules developed jointly with the CFTC defining the terms like "securities-based swap," and the players in the market like "securities-based swap dealer," and "major securities based swap market participant" will be the first to be implemented, according to the road map.
     Along with the definitional rules, the SEC wants to develop rules governing cross-border application of it swap market reforms. Dodd-Frank allows regulation of the activities of non-US persons and corporations to the extent that their market activity has a direct impact on the U.S. economy and CFTC Chair Gary Gensler has been an aggressive advocate of extending swap market regulation to foreign affiliates of U.S. financial firms.
     The next group of rules to be implemented would be those governing registration of swap data repositories where all swaps must eventually be reported and the forms and processes for reporting swap transactions.
     The SEC said that the sooner the repositories are up and running, the longer market participants will have to test their reporting software and identify any problems. Participants will have a chance to get used to the system by reporting historical swaps entered into prior to enactment of Dodd-Frank but whose terms did not expire before that date, which will be the first transactions that have to be reported to the repositories.
     The third group of rules to be implemented would be those governing the process for, and agencies to clear security-based swaps. Given the importance of the agencies in guaranteeing counterparty performance in the market the SEC originally wanted to implement this group of rules first. However, because they rely on the definitional rules and the existence of trade data reported to the repositories to determine if swaps need to be cleared, the commission placed them after those two groups of rules.
     The last two groups of rules to be implemented will be those governing registration and regulation of swap dealers and major swap participants followed by rules on the actual trading of the swaps and the creation of exchanges for those trades.
     Even within these two groups of rules the SEC says that phased implementation is necessary so as not to overwhelm market participants. For instance it proposes compliance with recordkeeping requirements first because these are easier to put in place than say internal controls on trading activity.
     Swap execution facilities or exchanges for trading swaps are central to Dodd-Frank reform of the swaps market because they introduce public transparency to trading in over-the-counter derivatives which have often been trading privately, usually by telephone. Many platforms already exist for swap trading however are likely to evolve into the formally regulated facilities described by the SEC.
     The SEC is asking for public comment on its sequencing plan and the roadmap includes extensive lists of questions about the implementation and timing of each group of rules.