Pursuant to a legislative requirement, GAO reviewed the Securities and Exchange Commission's (SEC) new rule on over-the-counter (OTC) derivatives. GAO noted that: (1) the rule would adopt the regulatory framework that allows U.S. securities firms to establish separately capitalized entities to conduct OTC derivatives business; (2) the rule would permit these non-broker-dealer entities to deal in both security and non-security derivative instruments in competition with U.S. banks and off-shore firms; (3) SEC asserts that regulation is intended in part to improve the efficiency and competitiveness of U.S. securities firms that are active in global OTC derivatives markets; and (4) SEC complied with the applicable requirements in promulgating the rule.
Securities and Exchange Commission: OTC Derivatives Dealers, OGC-99-17, November 18, 1998
November 18, 1998
The Honorable Alfonse M. D'Amato Chairman The Honorable Paul S. Sarbanes Ranking Minority Member Committee on Banking, Housing, and Urban Affairs United States Senate
The Honorable Thomas J. Bliley, Jr. Chairman The Honorable John D. Dingell Ranking Minority Member Committee on Commerce House of Representatives
Subject:Securities and Exchange Commission: OTC Derivatives Dealers
Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on a major rule promulgated by the Securities and Exchange Commission (SEC), entitled "OTC Derivatives Dealers" (RIN: 3235-AH16). We received the rule on October 26, 1998. It was published in the Federal Register as a final rule on November 3, 1998. 63 Fed. Reg. 59362.
The rule adopts the regulatory framework that allows U.S. securities firms to establish separately capitalized entities to conduct over-the-counter (OTC) derivatives business. The rule will permit these non-broker-dealer entities to deal in both security and non-security derivative instruments in competition with U.S. banks and off-shore firms. The SEC asserts that regulation is intended in part to improve the efficiency and competitiveness of U.S. securities firms that are active in global OTC derivatives markets.
Enclosed is our assessment of the SEC's compliance with the procedural steps required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule. Our review indicates that the SEC complied with the applicable requirements.
If you have any questions about this report, please contact Alan Zuckerman, Assistant General Counsel, at (202) 512-4586. The official responsible for GAO evaluation work relating to the Securities and Exchange Commission is Thomas McCool, Director, Financial Institutions and Markets Issues. Mr. McCool can be reached at (202) 512-8678.
Robert P. Murphy General Counsel
cc: The Honorable Jonathan G. Katz The Secretary of the Securities and Exchange Commission ENCLOSURE
ANALYSIS UNDER 5 U.S.C. 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION ENTITLED "OTC DERIVATIVES DEALERS" (RIN: 3235-AH16)
(i) Cost-benefit analysis
Although the SEC was not required to prepare a cost-benefit analysis of the rule, it did prepare such an analysis based in large part on the information furnished by five securities firms. These organizations provided cost information on a confidential basis. In sum, the SEC states that most responding firms expected significant benefits because of the regulatory capital savings, increased capital efficiency, and efficiencies resulting from business consolidation, all of which outweighed the increased one-time and continuing operating costs associated with conducting the OTC derivatives business as OTC derivatives dealers.
(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. 603-605, 607, and 609
The Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the notice of proposed rulemaking, 62 Fed. Reg. 67940, December 30, 1997. The SEC sought comments on the proposed rulemaking, including comments on the initial regulatory flexibility analysis.
The IRFA provides the information required by paragraphs 603(b)(1), (b)(2), (b)(3), and (b)(4). It describes the reasons for the proposed agency action; its objectives; the legal basis; and the reporting, recordkeeping, and other compliance requirements of the proposed rule.
The rule incorporates the Final Regulatory Flexibility Analysis (RFA) consistent with the requirements of 5 U.S.C. 604. The analysis notes that no small entities are expected to be affected by the rule since the capitalization requirements for an OTC derivatives dealer will prevent a small entity from registering as an OTC derivatives dealer. The SEC satisfies the requirements of section 604(a). It describes the need for and objective of the final rule.
(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532-1535
As an independent regulatory agency, the SEC is not subject to title II of the Unfunded Mandates Reform Act of 1995.
(iv) Other relevant information or requirements under acts and executive orders
Administrative Procedure Act, 5 U.S.C. 551 et seq.
The SEC promulgated this rule under the notice and comment procedures of 5 U.S.C. 553. A notice of proposed rulemaking was published on December 30, 1997, 62 Fed. Reg. 67940. The SEC received comments in response to the notice, and in its report indicates that it gave full consideration to the comments filed by the interested parties.
Paperwork Reduction Act, 44 U.S.C. 3501-3520
The information collection requirements have been reviewed by the Office of Management and Budget (OMB) and has been assigned OMB control number 3235-0498.
Statutory authorization for the rule
Securities Exchange Act of 1934, 15 U.S.C. 78a et seq.
Executive Order No. 12866
As the rule is promulgated by an independent regulatory agency, it is not subject to the review requirements of E.O. 12866.