Workable rules are essential to maintain the confidence of the American public in the integrity of our derivatives markets.  So, when we become aware that our rules are not as workable as we thought, or impose substantial operational burdens with little corresponding regulatory benefit, we should address these shortcomings promptly.  Unfortunately, though, the Commission sometimes chooses to “kick the can down the road” by relying on staff no-action letters instead – often for many years – without tackling the root cause of the problem in the rule itself.

I have not been shy about expressing my feelings related to no-action letters during my tenure as a Commissioner.  Yes, there are appropriate reasons for staff to issue no-action letters, and I do see their utility in providing flexibility when needed.  However, I believe there has at times been an over-reliance on this practice at the agency, and we must move forward in a manner that respects the role of the Commissioners in agency policy-making.

My point is perfectly illustrated by Commission Rule 37.6(b) regarding confirmations for swaps executed on or pursuant to the rules of a swap execution facility (“SEF”).  The rule requires that a SEF provide each counterparty to a transaction with a written record of all the terms of the transaction.[1]  But things get complicated with respect to uncleared swaps, since the terms of such swaps also may include previously-negotiated agreements between the counterparties (such as an ISDA Master Agreement, and related Schedule and Credit Support Annex).

Accordingly, when the Commission adopted Rule 37.6(b) in 2013, it stated that a SEF’s written confirmation of an uncleared swap can incorporate the terms of such agreements by reference, but with a catch – namely, that such agreements must be submitted to the SEF prior to execution.[2]  This approach imposed on each SEF the virtually impossible (and, frankly, needless) task of building and maintaining a library of every previous bilateral agreement from counterparties to uncleared swap transactions on its platform.

Recognizing the enormous operational problems posed by the Commission’s approach to SEF swap confirmations for uncleared swaps, as well as the limited value of that approach, Commission staff issued four successive no-action letters beginning in 2014.[3]  Although it has taken a full decade, I am pleased that the Commission is finally adopting a permanent and practicable SEF confirmation solution. These rule amendments, among other things, will codify the existing staff no-action position that permits SEFs, in an uncleared swap confirmation, to incorporate by reference the terms of previously-negotiated counterparty agreements without obtaining the underlying agreements themselves.

I am pleased to support these rule amendments.  I thank Roger Smith and his colleagues in the Division of Market Oversight, as well as staff in the Office of General Counsel and the Chief Economist’s Office, for their work on this rulemaking.

But there remains more work to be done in this regard.  I will continue to push the agency to act through notice-and-comment rulemaking, rather than relying on perpetual staff no-action relief, with respect to other rules that are not workable for those who must comply with them – especially where, as here, their asserted benefits are largely illusory.