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Sunday, March 3, 2024 | Back issues
Courthouse News Service Courthouse News Service

SEC Plans New Rules for|Securities Based Swaps

WASHINGTON (CN) - Traders engaging in securities based swaps will be held liable for any activity that alters the value of the underlying securities in the swap over the life of the contract, according to rules proposed by the Securities Exchange Commission.

The rules would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Security-based swaps are defined under the act as any trade "that is based on a narrow-based security index, or a single security or loan, or any interest therein or on the value thereof, or the occurrence or non-occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition, or financial obligations of the issuer."

The swaps are already covered under the general anti-fraud and anti-manipulation provisions of existing securities laws. Unlike other securities, however, securities-based swaps involve the transfer of cash or other assets during the term of the swap that varies with the performance of the underlying security.

This could create a motive for people involved in the trade to undermine the performance of the underlying securities to minimize the transfer of value to the counter-party and according to the SEC hopes that creating a rule specifically banning such manipulation is necessary to establish clear liability in addition to existing regulation.

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