Following last Thursday’s government hearing on further laws to be included in the Dodd-Frank act to regulate financial institutions and safeguard client capital, SEC Chairman Elisse B Walker has provided a detailed testimony in relation to the structured implementation of such laws.

Among the many points featured is a host of proposed motions in relation to how OTC derivatives are sold and managed in the United States, the responsibilities of broker/dealers along with further investor protection policies such as the Volcker Rule.

A detailed summary of the testimony is as follows:

OTC Derivatives

Among the key provisions of the Dodd-Frank Act are those that establish a new oversight regime for the over-the counter (“OTC”) derivatives marketplace. Title VII of the Act requires the Commission to regulate “security-based swaps” and to write rules that address, among other things, mandatory clearing, reporting and trade execution, the operation of clearing agencies, data repositories and trade execution facilities, capital and margin requirements and business conduct standards for dealers and major market participants, and public transparency for transactional information.

Among other things, such rules are intended to:

• Facilitate the centralized clearing of swaps, with the intent of reducing counterparty and systemic risk

• Increase market transparency

• Increase security-based swap transaction disclosure.

• Address potential conflict of issues relating to security-based swaps.

Title VII Implementation Generally

The Commission has proposed substantially all of the core rules required by Title VII. In addition, the Commission has adopted a number of final rules and interpretations, provided a “roadmap” to implementation of Title VII, and taken other actions to provide legal certainty to market participants during the implementation process.

In implementing Title VII, Commission staff is in regular contact with the staffs of the CFTC, the Board of Governors of the Federal Reserve System (“Board”) , and other federal financial regulators, and in particular has consulted and coordinated extensively with CFTC staff.

Adoption of Key Definitional Rules

In July 2012, the Commission adopted final rules and interpretations jointly with the CFTC regarding key product definitions under Title VII.

This effort follows the Commission’s work on the entity definitions rules, which the Commission adopted jointly with the CFTC in April 2012.

The completions of these joint rulemakings are foundational steps toward the complete implementation of Title VII.

The July joint rulemaking addressed certain product definitions and further defined the key terms “swap,” “security-based swap,” and “security-based swap agreement.” It also adopted rules regarding the  Regulation  Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry.In its most basic sense, regulators help ensure the filing of reports and transmission of data to help police and monitor activity by brokers. Regulators also serve as a countermeasure against market abuse and malpractice by brokers. Brokers adhering to a list of mandated rules are authorized to provide investment activities in a given jurisdiction. By extension, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation.Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors.In terms of reporting, brokers are also required to regularly file reports about their clients’ positions to the relevant regulatory authorities. The most-recent regulatory push in the aftermath of the Great Financial Crisis of 2008 has delivered a material shift in the regulatory reporting landscape.Brokers typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.Beyond FX, regulators help reconcile all matters of oversight and are watchdogs for each industry. With ever-changing information and protocols, regulators are always working to promote fairer and more transparent business practices from brokers or exchanges. Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry.In its most basic sense, regulators help ensure the filing of reports and transmission of data to help police and monitor activity by brokers. Regulators also serve as a countermeasure against market abuse and malpractice by brokers. Brokers adhering to a list of mandated rules are authorized to provide investment activities in a given jurisdiction. By extension, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation.Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors.In terms of reporting, brokers are also required to regularly file reports about their clients’ positions to the relevant regulatory authorities. The most-recent regulatory push in the aftermath of the Great Financial Crisis of 2008 has delivered a material shift in the regulatory reporting landscape.Brokers typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.Beyond FX, regulators help reconcile all matters of oversight and are watchdogs for each industry. With ever-changing information and protocols, regulators are always working to promote fairer and more transparent business practices from brokers or exchanges. Read this Term of “mixed swaps” and the books and records requirements for security-based swap agreements. The April joint rulemaking further defined the key terms“swap dealer” and “security-based swap dealer,” providing guidance as to what constitutes dealing activity, and distinguishing dealing from non-dealing activities such as hedging.

The rulemaking also implemented the Dodd-Frank Act’s statutory de minimis exception to the security-based swap dealer definition in a way tailored to reflect the different types of securitybased swaps. Additionally, the rulemaking implemented the Dodd-Frank Act’s “major security based swap participant” definition through the use of three objective tests.

While foundational, these final rules did not trigger compliance with the other rules the Commission is adopting under Title VII. Instead, the compliance dates applicable to each final rule will be set forth in the adopting release for the applicable rule. In this way, the Commission is better able to provide for an orderly implementation of the various Title VII rules.

Adoption of Clearing Agency Standards

Clearing agencies play a critical role in the financial markets by ensuring that transactions settle on time and on agreed-upon terms. To promote the integrity of clearing agency operations and governance, the Commission adopted rules requiring all registered clearing agencies to maintain certain standards with respect to  Risk Management  Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent. One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent. Read this Term and certain operational matters.

The rules also contain specific requirements for clearing agencies that perform central counterparty services. For example, such clearing agencies must have in place written policies and procedures reasonably designed to:

• Measure their credit exposures to participants at least once a day.

• Use margin requirements to limit their credit exposures to participants, to be reviewed at least monthly.

• Maintain sufficient financial resources to withstand, at a minimum, a default by the participant family to which the clearing agency has the largest exposure in extreme but plausible market conditions (with a higher requirement that agencies clearing security based swaps maintain sufficient resources to cover the two largest participant family exposures).

• Provide the opportunity to obtain membership in the clearing agency for persons who are not dealers or security-based swap dealers on fair and reasonable terms.

The rules also establish record keeping and financial disclosure requirements for all registered clearing agencies as well as several new standards for clearance and settlement. The new rules were the result of close work between the Commission staff and staffs of the CFTC and the Board.

The requirements take into consideration recognized international standards, and they are designed to further strengthen the Commission’s oversight of securities clearing agencies, promote consistency in the regulation of clearing organizations generally, and thereby help to ensure that clearing agency regulation reduces systemic risk in the financial markets.