WASHINGTON (CN) – The Securities and Exchange Commission has permanently exempted security-based credit default swaps cleared through central counterparties from all requirements of the Securities Act, except for its anti-fraud provisions.
The commission has already exempted such swaps under temporary rules designed to encourage clearing agencies to act as central counterparties to maintain liquidity in the swaps market while reducing systemic default risks.
Those rules allowed clearing agencies to engage in the practice of novation, in which the obligation between a buyer and seller is replaced by a central counterparty as the seller to the buyer and the buyer to the seller.
In novation, the risk of poor credit by either part is replaced by the creditworthiness of the central counterparty.
The practice was adopted during the financial meltdown of 2008-2009 to keep still-active credit default swap agreements from collapsing as the creditworthiness of participants collapsed along with the financial markets.
The exemption applies only to security-swaps traded through registered or otherwise exempt clearing agencies, and does not apply to any securities that may actually be exchanged to settle the swap. In most swaps, the underlying securities are not actually sold, rather their cash flow, principal or value, are temporarily traded.
The permanent rules are effective April 16.