August 21, 2023

Vanessa Countryman, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-1090

Re: Reopening of Comment Period for Position Reporting of Large Security-Based Swap Positions (File No. S7-32-10)

Dear Ms. Countryman:

The Institute of International Bankers (“IIB”), International Swaps and Derivatives Association (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA”) (together, the “Associations”)1 appreciate the opportunity to provide comments to the Securities and Exchange Commission (the “Commission” or “SEC”) in response to the Commission’s above- captioned reopening of the comment period (“Reopening Release”)2 for its proposal regarding security-based swap (“SBS”) position reporting requirements, as set forth in proposed Rule 10B-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and proposed Schedule 10B (“Proposed Rule 10B-1”).3

We appreciate the Commission’s decision to seek additional comments on Proposed Rule 10B-1. As we expressed in our prior comment letter (the “2022 IIB/ISDA/SIFMA Comment Letter”),4 rushing to implement Proposed Rule 10B-1, especially its public disclosure requirements, would result in a negative impact to the SBS markets and, importantly, to the global capital formation ecosystem that depends on vibrant SBS markets to hedge risk.

We are also disappointed that the Reopening Release and associated economic analysis (“DERA Memo”)5 do not address the core concerns we raised in the 2022 IIB/ISDA/SIFMA Comment Letter. Most notably, the Reopening Release and DERA Memo do not address concerns that the data captured by Proposed Rule 10B-1 would be misleading and confusing when publicly disseminated. They also do not address the risk that opportunistic traders could cherry-pick that data in order to reverse engineer and front run other market participants’ trading strategies.

The Reopening Release and DERA Memo further do not attempt to quantify or describe how the benefits of position-level disclosure under Proposed Rule 10B-1, on top of the already extensive transaction-level reporting under Regulation SBSR, would outweigh these costs and risks, in addition to the operational costs and burdens of establishing and maintaining new reporting systems and processes. These costs and burdens would be present even if the Commission limited Proposed Rule 10B-1 to regulatory reporting—firms would be required to expend significant resources to implement the rule with no material incremental benefit to the Commission, given that the Commission already has access to the data needed to understand and monitor the SBS markets, as evidenced by the DERA Memo itself.

In light of these gaps, below we supplement the 2022 IIB/ISDA/SIFMA Comment Letter with additional examples and explanation of the adverse impact that Proposed Rule 10B-1 would have on U.S. companies and investors. We further address how the Commission has failed to justify the adoption of Proposed Rule 10B-1. We conclude by responding to the specific requests for comment set forth in the Reopening Release.

I. Proposed Rule 10B-1 Would Result in Misleading and Harmful Public Disclosures

Market participants frequently use the SBS markets to achieve a variety of hedging and other trading objectives that help promote capital formation and economic expansion. Below we provide some specific examples of such use of the SBS markets and the harmful impact that Proposed Rule 10B-1’s public disclosure requirements would have.

Credit Default Swap Examples

Market participants frequently purchase single-name credit default swaps (“CDSs”) to hedge credit exposure. Examples include:

• A bank purchases CDSs to comply with internal risk limits when making additional loans to a borrower. Efficient access to the CDS market enables the bank to expand its lending capacity to borrowers with whom it has a long-term relationship, which is especially important to those borrowers during periods when general credit market conditions make it more difficult to access public debt markets;
• A swap dealer purchases CDSs to manage the credit risk associated with entering into swaps with a commercial end user entering into those swaps to hedge or mitigate its commercial risks. Efficient access to the CDS market enables the dealer to provide these hedging services during periods where increasingly volatile interest rate, foreign exchange, or commodity prices lead the dealer to assume greater potential credit exposure to its commercial end user counterparties, even as that volatility likewise makes access to such hedging services more important to those commercial end users; and
• An institutional investor purchases CDSs to hedge credit risks to issuers of bonds it has purchased. Efficient access to the CDS market enables the investor to continue to provide liquidity in primary debt capital market issuances during periods of increasing credit market volatility. Requiring public disclosure of CDS positions in these circumstances would have several negative consequences. Most notably, it would make it much more costly to enter into the CDSs, possibly prohibitively so. When an SBS dealer provides liquidity in CDSs, it must in turn hedge that exposure. Only a handful of non-sovereign CDS names average 10 or more trades per day, which is 3% or less of the total universe of names that trade in the CDS market.6 Therefore, depending on the size of the position, it can take the dealer days or even weeks to hedge that risk. If either the dealer or its customer is required to disclose its position publicly, opportunistic market participants could easily front run the dealer’s hedging activity. The dealer would have to take that risk into account when deciding how to price or whether to provide the CDS. If the SBS dealer could not make the CDS available, or available at a suitable price, then the bank, swap dealer, or investor may forgo its lending, hedge providing, or investing activity entirely.

 

1 Descriptions of the Associations are included in the attached Appendix.

2 Release No. 34-97762 (June 20, 2023), 88 Fed. Reg. 41338 (June 26, 2023).

3 Prohibition Against Fraud, Manipulation, or Deception in Connection With Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Release No. 34-93784 (Dec. 15, 2021), 87 Fed. Reg. 6652 (Feb. 4, 2022) (“Proposing Release”).

4 Comment Letter from the Associations Regarding the Proposing Release (March 21, 2022), available at https://www.sec.gov/comments/s7-32-10/s73210-20120774-272955.pdf.

5 In connection with the Reopening Release, the Commission’s Division of Economic and Risk Analysis (“DERA”) released a memorandum providing “[s]upplemental data and analysis regarding the proposed reporting thresholds in the equity security-based swap market.” Memorandum from DERA to SEC File No. S7-32-10 (June 20, 2023), available at https://www.sec.gov/comments/s7-32-10/s73210-207819-419422.pdf.

6 See ISDA, Single-name CDS Market Update (May 2023), available at https://www.isda.org/a/0jLgE/Single-name-CDS-Market-Update.pdf.