SEC final rules on security-based swaps and Reg M          

The Securities and Exchange Commission (SEC) has adopted new rules to prevent fraud, manipulation, and deception in connection with security-based swap transactions. The rules are designed to protect investors and market integrity by preventing misconduct in the security-based swaps market. 

The new rules include: 

• An antifraud and anti-manipulation rule that prohibits misconduct in connection with effecting any transaction in, or attempting to effect any transaction in, or purchasing or selling, or inducing or attempting to induce the purchase or sale of, any security-based swap. 
• A rule that prohibits personnel of security-based swap dealers and major security-based swap participants (SBS Entities) from taking any action to coerce, mislead or otherwise interfere with the SBS Entity’s chief compliance officer. 
• A rule to protect the independence and objectivity of the chief compliance officer of a security-based swap dealer or major security-based swap participant. 

“Any misconduct in the security-based swaps market not only harms direct counterparties but also can affect reference entities and investors in those reference entities,” said SEC Chair Gary Gensler. “Given these markets’ size, scale, and importance, it is critical that the Commission protect investors and market integrity through helping prevent fraud, manipulation, and deception relating to security-based swaps. Today’s set of rules will do just that.” 

The SEC has also announced rule changes to remove and replace references to credit ratings from existing exceptions provided in Rule 101 and Rule 102 of Regulation M, a set of rules that prohibits activities that could artificially influence the market for an offered security. 

SFC CEO outlines four-prong plan to establish Hong Kong as asset management hub  

In a speech at the 16th HKIFA Annual Conference, SFC CEO Julia Leung outlined her strategy to bring Hong Kong to the “next level” as an international asset management hub and private wealth centre. Leung covered four areas in particular: 

Onshoring – Leung outlined two new fund structures: for open-ended fund (OEF) companies and limited partnership funds LPF) noting: “This year, we are making a significant legislative change in our ongoing efforts to build up Hong Kong as an onshore asset management hub. This is the introduction of Type 13 Regulated Activity (RA) covering fund depositary services. RA 13 will take effect in October 2024 after completing the legislative process.” 

Platforms – Leung focused on connecting platforms to mainland China investors as key to the SFC strategy, stressing that building numerous conduits to reach mainland investors will be key to increasing sales 

Products – Leung highlighted three areas for growth: ESG products, virtual assets and renminbi-denominated products. 

Technology and Services – Leung touched on AI noting that “AI can be used responsibly to augment, rather than replace, asset managers in strategic decision making” but adding that “Firms should also have qualified staff managing their AI tools, as well as proper senior management oversight and a robust governance framework for AI applications. For any conduct breaches, the SFC would look to hold the licensed firm responsible—not the AI.” 

CFTC confirms rule amend for DCOs   

The Commodity Futures Trading Commission (CFTC) has unanimously approved a final rule that introduces amendments to existing regulations for derivatives clearing organisations (DCOs). The rule requires DCOs to establish risk management committees (RMCs) and consult with them on issues that could significantly impact the DCO’s risk profile. These committees will consist of members from clearing organisations and their customers. 

Additionally, the rule sets minimum requirements for the composition and rotation of RMCs. DCOs will be required to establish and enforce fitness standards for RMC members. To ensure transparency and clarity, DCOs must maintain written policies and procedures outlining the RMC consultation process and the roles of RMC members. 

Furthermore, the rule necessitates DCOs to establish one or more risk advisory working groups (RWGs) comprising market participants. These groups must convene at least twice per year and adopt written policies and procedures regarding their formation and role. 

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