Regulatory round-up — U.S. rules to know in 2012

December 16, 2011

By Nick Paraskeva

NEW YORK, Dec. 16 (Thomson Reuters Accelus) – Several recently adopted rules in the U.S. are going into effect for specific types of firms in 2012. These rules include ones released by the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve, issued to implement the Dodd-Frank Act and as a response to market developments.

The SEC-adopted rules requiring reporting by advisers to hedge funds and by large traders of securities are explained below. We also cover the CFTC final rules on derivative clearing firms in the swaps market and provide a summary of the Fed’s final rules on living wills for large banks, and non-bank systemically important financial institutions (SIFIs), under the Dodd-Frank Act.


The SEC issued rules requiring advisers to private funds, such as hedge funds, private equity funds and liquidity funds, to submit new reports on their potential systemic risks under the Dodd-Frank Act as of October 26. The rule revises the SEC’s proposed rules that were issued in January 2011, following industry comment.

The new information reported by the fund advisers will be used by the SEC to provide information to the Financial Systemic Oversight Council (FSOC), which was created under Dodd Frank to monitor systemic risk in the U.S. financial system. The information will be reported to the SEC using a new Form PF by specified advisers to private funds, and it will remain confidential rather than being published.

Reporting will be required for large private fund advisers that are managing hedge funds, liquidity funds and private equity funds. A large adviser is one that manages a hedge fund that has $1.5bn assets, or that manages liquidity funds with $1bn assets, or a private equity fund with $2bn assets. The SEC estimates that only 230 of U.S. hedge fund advisers and 155 private equity advisers are in the large category, which comprises 80 percent of market share.

Large hedge fund advisers will be required to report on their fund exposures by type of asset, geographic concentration and turnover. For each fund of $500mn net asset value, advisers will report quarterly on its investments, leverage, risk and liquidity. Large liquidity fund advisers must file a form on all the funds managed, within 15 days of the quarter’s end.

Large private equity advisers are only required to report annually, including on their fund leverage, bridge-financing, and certain financial investments.

The rule exempts advisers managing under $150mn (on a de minimis basis) from filing the form at all.

Smaller advisers that manage funds with assets above $150mn, but below the level needed to be large advisers, would only be required to file the form once a year, containing basic information.

The new reporting forms were coordinated with overseas regulators, such as the UK’s Financial Services Authority (FSA), the International Organization of Securities Commissions (IOSCO), and the European Sales and Marketing Association (ESMA) to enable a consistent cross-border approach for international.

The filing deadline is 60 days for larger hedge funds, 120 days for small funds and large private equity advisers. Most advisers will begin filing after December 15, 2012, although larger advisers with over $5bn will do so after June 15, 2012.


The SEC adopted rules establishing large trader reporting requirements on July 26. “Large traders” will be required to register with the SEC using new Form 13H and will be assigned a unique LTID number. Large traders will then be required to provide this ID number to their broker-dealers, who will maintain transaction records for them in the event they are required by the SEC.

The SEC proposed the large trader rule in April, as part of a market reporting system that aims to identify firms that conduct high levels of trades and to detect potential abusive trading. The rule proposal received a large number of comments; the SEC has stated that they have factored them into the final version.

Large traders are required to report to their broker-dealer all of the accounts held at the broker through which they trade. The broker-dealer is then required to detail the large trader information and records that it has collected to the SEC, when requested. The new information collected expands on the prior Electronic Blue Sheets (EBS) data that broker-dealers previously used to report their transactions. The additional items that a broker-dealer will now need to maintain are the LTID number, and the time that a trade occurs.

The data is required to be available for reporting on the morning after trading occurs, and the SEC allows a one-day response time to the broker after the information is requested. Broker-dealers are also required to monitor if their customers meet the threshold level for the large trader rule. This will require broker-dealers to have their own policies and procedures to inform such persons of their requirement to register as large traders.

The rule defines large traders by using two separate tests:

  • Persons with trades in listed securities that total over 2mn shares, or $20 million in value, during any one calendar day; and
  • A person or firm with trades that total over 20 million shares, or $200 million, during any calendar month.

The rule aims to enable the SEC to reconstruct market events, such as the ‘flash crash,’ and to carry out investigations and enforcement actions as required. The information will also enable the SEC to track the increasing use by some firms of sophisticated or high-frequency trading across multiple venues in high volumes and at fast speeds.

The rule is effective 60 days after it is published, with large traders having two months to comply and broker-dealers having seven. It was published in the Federal Register on August 3, 2011, and was effective for large traders on October 3.

The compliance date for the requirement that large traders register with the SEC is December 1, 2011. The compliance date for broker-dealers to monitor large trader activity is April 30, 2012.


The CFTC issued final rules for derivative clearing organizations (DCOs) under the Dodd-Frank Act on October 18. The regulations establish standards for compliance within the framework of several core principles and reflect the current status of new international principles that are being developed by IOSCO’s Committee on Payment and Settlement Systems. The principles cover the clearing organization’s compliance and legal processes. They also cover its level of financial resources, the risk of default, its risk management programs, systems, record-keeping and reporting processes.

A clearing organization is required to hold financial resources that would cover its financial obligations to its clearing members, in the event of a default by the clearing member creating the largest exposure. The level of resources must also be adequate to meet the DCO’s own operating costs for at least one year.

The clearing organization must collect initial margin on a gross basis from its clearing member’s customer accounts. For interest rates and index swaps, such as CDS, the minimum margin should be for a five-day liquidation period. For physical commodity swaps, such as energy, metals and agriculture, there is a need to cover a one-day period.

The DCO risk management framework should include a methodology for setting margins, price data, performance of daily review and periodic back-testing. Other risk control mechanisms include risk limits, review of large trader reports, stress test and reviews of clearing members’ risk management policies and procedures.

Customer funds and assets should be segregated by the type of margin, their valuation, haircuts and concentrations. DCO eligibility requirements for participants should allow fair and open access to clearing membership by futures commission merchants.

The rules impose reporting requirements on clearing organizations to the CFTC and application procedures for potential new DCOs that are intended to be uniform and transparent. The clearing organization should designate a Chief Compliance Officer whose duties will include the filing of an annual report.


The Federal Reserve (Fed) issued rules requiring resolution plans (or living wills) for large banks and non-bank SIFIs under the Dodd Frank Act on October 17. These firms are required to submit annual resolution plans and any material revisions to the Fed, as well as to the FDIC, which adopted a similar rule in September 2011.

The rules apply to bank holding companies with over $50bn in total assets and to any non-banks that the FSOC has designated as systemically important. The information in the plans will allow FDIC to plan for potential use of its new resolution authority and enable the Fed to supervise for systemic risk.

Plans include a new regulatory tool that aim to limit too-big-to-fail firms from having to be rescued at taxpayer expense. The regulators may thereby impose higher capital, leverage or liquidity requirements on those firms when they view a plan as inadequate and, in certain cases, may restrict future growth of the firm.

A U.S.-domiciled company is required to be assessed and to provide information in the plan on both its US and foreign operations. Foreign banks will be assessed on their global consolidated assets, rather than just U.S. assets, but they will be allowed to submit a tailored report. This will include their U.S. operations and how their resolution planning is linked to the parent company and oversight by the home regulator.

The plan content should describe a firm’s strategy for a rapid, orderly resolution in any future bankruptcy and in times of distress. This will include a strategic analysis of the plan components and specific actions that the firm will propose to take in the event of resolution. The plan should show how a bank in the group could be resolved separately from the parent structure in a future financial crisis. It should state the firm’s organizational structure, key legal entities, any financial interconnections and dependencies, the information systems it uses and any key risks that it faces.

The plan should identify cross-guarantees on securities holdings, any major counterparties that it deals with, and other parties to which its collateral is pledged. It should also report on the level of credit exposures to other systemic firms and such firm’s exposures back to the entity that is submitting the plan.

The Fed agreed to defer its earlier proposal for quarterly reports of such exposures until an expected new rule on single counterparty credit limit is adopted. The plan should also describe the firm’s corporate governance for overseeing the resolution plan and specify a senior management official who will be responsible for it. Only the resolution plan summary and certain sections will be published, with confidentiality for the other information, including an exemption under the Freedom of Information Act (FOIA).

The implementation date applies first to companies with $250 billion or more in non-bank assets, who must submit their initial plan by July 1, 2012. Firms with $100 billion to $250 billion in total non-bank assets must submit their initial plans by July 1, 2013. Remaining firms subject to rule — those with under $100 billion in non-bank assets — must submit their initial plan by December 31, 2013.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete ( ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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