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Recordkeeping and Reporting Requirements Proposed for Swap Dealers

April 18, 2014

The SEC issued proposed recordkeeping and reporting requirements for swap dealers. The proposal also includes requirements for accountants in examining financial reports of swap dealers that are similar to the requirements for auditors of broker-dealers.

The SEC on April 17, 2014, issued Release No. 34-71958, Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, a day after the commissioners voted to release proposed reporting rules governing swap dealers.

As part of an overall effort to regulate over-the-counter derivatives required by the Dodd-Frank Act, the SEC’s latest proposal would add Section 15F to the Securities Exchange Act of 1934 and covers recordkeeping, reporting, and notification for swap dealers and major swap participants.

Comments are due 60 days after publication in the Federal Register, which normally occurs a few days after a rule is posted on the SEC’s website.

Release No. 34-71958 would require registered swap dealers and major swap participants to maintain daily trading records and related records—including cash or forward transactions—and recorded communications, including email, instant messages, and recordings of telephone calls. They would also need to maintain daily trading records for each counterparty in a way that is identifiable with each transaction.

The swap dealers and major swap participants must maintain a complete audit trail to conduct comprehensive and accurate trade reconstructions.

The release says that the proposed requirements are modeled on the recordkeeping program for broker-dealers, which spell out what and how the records must be kept.

The SEC in November 2010 issued Release No. 34-63346, Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, to propose reporting of certain data elements to swap data repositories.

Data under Release No. 34-63346 will also need to be documented in the daily trading records, ledger accounts, memoranda of brokerage orders, and memoranda of proprietary trades of swap transactions under the latest proposal.

They would include the type of swaps; the reference security, index, or obligor; the date and time of execution; the effective date; the termination or maturity date; the notional amount; the unique transaction identifier; and the unique counterparty identifier.

The proposal would also require non-bank swap dealers and major participants to fill out a form that includes a statement of financial condition; a computation of net capital and minimum net capital required; a statement of income or loss; a statement of capital withdrawals; certain financial and operational data; a customer reserve account computation; information for possession or control; and a computation of reserve requirements for proprietary accounts of broker-dealers.

For banks, the reporting requirements include a balance sheet, a statement of regulatory capital, and an income statement.

Non-banks also will be required to report information about their exposures arising from their swap transactions, including gross replacement values, net replacement values, current net exposure, total exposure, and margin collected.

Banks will also need to fill out a schedule to report the aggregate long and short positions for cleared and non-cleared swaps, including debt swaps; equity swaps, credit default swaps; and other swaps.

The release also has proposed requirements for independent public accountants scrutinizing financial activities of swap dealers and major participants.

Similar to Rule 17a-5 that was amended last year for broker-dealers, the SEC is proposing to include parallel engagement for stand-alone swap dealers and major participants. (See Release No. 34-70073 Aligns Broker-Dealer Reporting with PCAOB Supervision in the August 1, 2013, edition of Accounting & Compliance Alert. )

The accountants must prepare a report based on an examination of the financial report and, for swap dealers, a report based on an examination of certain statements in a compliance report.