A Concerning Trend: Widespread Breaches in the Security-Based Swap Dealer Landscape 

The security-based swap market is a complex and dynamic landscape, and it is crucial for dealers to adhere to the regulations governing their activities. However, a recent Risk Alert issued by the SEC Division of Examinations has shed light on a concerning trend – widespread breaches by security-based swap dealers (the “Dealers”) in various aspects of their operations. 

Reporting Woes: Inaccuracies and Missed Deadlines 

One of the key areas of concern highlighted in the Risk Alert is the Dealers’ handling of security-based swap transaction reporting. The Division identified several deficiencies, including: 

Delayed Reporting 

Failure to report security-based swap trade data to a registered security-based swap data repository within the required deadlines. 

Inaccurate Primary Trade Information 

Reporting of notional amounts with inaccuracies, including miscalculations and economically implausible figures. Incorrect information about underlying assets, such as inaccurate International Securities Identification Numbers (ISINs) or improper classification of basket transactions. 

Flawed Secondary Trade Details 

Inaccurate reporting of counterparty identifications, including the use of internal identifiers for transactions not subject to privacy laws or involving natural persons. Missing data in fields for buyer, seller, receiver, or payer. 

Compliance Shortcomings: Business Conduct and Documentation 

The Division’s findings also highlighted deficiencies in the Dealers’ compliance with business conduct standards and trading relationship documentation requirements. 

Inadequate Supervision 

Failure to identify all associated persons responsible for executing or involved in executing security-based swap transactions, resulting in non-compliance with supervisory obligations. 

Weak Documentation Practices 

Lack of independent audits for security-based swap trading relationship documentation policies and procedures. Failure to maintain records of senior officer approvals for these policies and procedures. Absence of written agreements with counterparties regarding portfolio reconciliation terms. 

Recordkeeping Lapses: Incomplete and Inaccurate Records 

The Division’s examination also revealed that certain Dealers failed to consistently create and maintain comprehensive, up-to-date, and accurate records, including trade blotters, counterparty listings, and associated person listings. 

A Call for Heightened Vigilance 

The widespread breaches uncovered by the Division’s Risk Alert underscore the critical importance for security-based swap dealers to strengthen their compliance practices and ensure strict adherence to the applicable regulations. Dealers must prioritize enhancing their reporting mechanisms, reinforcing business conduct standards, and improving their recordkeeping processes to restore trust and integrity in the security-based swap market. 

As the regulatory landscape continues to evolve, security-based swap dealers must remain vigilant, proactively address these compliance gaps, and demonstrate a steadfast commitment to safeguarding the integrity of the market and protecting the interests of all stakeholders. 

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