Capital Brief: SEC Seen Adding Broker-Dealer Classification

The Securities and Exchange Commission today is expected to approve a new classification for broker-dealers active in over-the- counter derivatives.

Under the new rule, dubbed "broker-dealer light," broker-dealers could choose to move swaps and options activity currently conducted overseas or in an unregulated affiliate into a lightly regulated subsidiary. Capital requirements would be far less stringent than those imposed on derivatives booked overseas.

Industry representatives were largely supportive of the rule, which was proposed in December.

"The new category will remove barriers to efficiencies with respect to consolidating OTC (over-the-counter) derivatives activities," said Jerry Quinn, vice president and associate general counsel at the Securities Industry Association.

Zachary Snow, managing director at Salomon Smith Barney and chairman of the Securities Industry Association's over-the-counter derivatives committee, said the new classification would likely bring some business back from overseas. It would also "increase the presence of the SEC" in the market, he said.

The SEC's minimum capital requirement of $100 million would allow only serious players to register a derivatives subsidiary. Mr. Snow predicted that five to 10 firms would do so within the first year.

He disagreed that the recent bailout of Long-Term Capital Management might lead the SEC to make the voluntary derivatives subsidiary mandatory. "I don't see the hedge fund episode as necessarily leading to the conclusion that you need to regulate all dealers in derivatives."

-Scott Barancik