SEC Dealer Rules Require Significant Liquidity Providers to Register

The SEC said in its press release that persons engaging in the liquidity-providing activities described in the rules will, absent an exception or exemption, have to register with the Commission under Section 15(a) or Section 15C of the Securities Exchange Act of 1934, become members of a self-regulatory organisation and comply with federal securities laws, SRO rules and, where applicable, Treasury requirements. The rules were first proposed on 28 March 2022.

What the rules require

According to the SEC's fact sheet, a person will be a dealer or government securities dealer if, as part of a regular business, it regularly expresses trading interest at or near the best available prices on both sides of the market for the same security, communicated in a way that makes it accessible to other market participants, or if it earns revenue primarily from capturing bid-ask spreads or from incentives offered by trading venues to liquidity-supplying trading interest.

The rules exclude any person that has or controls total assets of less than $50 million, as well as investment companies registered under the Investment Company Act of 1940, central banks, sovereign entities and international financial institutions. The SEC adds that no presumption arises that a person is not a dealer simply because it does not engage in the activities the rules identify.

Who is affected

The SEC explains that advances in electronic trading have allowed some market participants to play an increasingly significant liquidity-providing role, particularly in the US Treasury market, without being registered as dealers. Firms that trade actively in Treasuries and other securities, including proprietary trading firms and funds that are not registered investment companies, will need to assess whether their strategies meet either qualitative standard. Firms that do will take on the regulatory obligations that come with registration and SRO membership.

What happens next

The rules take effect 60 days after publication in the Federal Register, and the compliance date is one year after the effective date. Affected firms will use that period to analyse their trading activity, prepare registration and SRO membership applications, and build the compliance infrastructure required of registered dealers. The SEC presents the change as supporting market resiliency and investor protection across the Treasury and other securities markets.

Sources

• SEC: SEC Adopts Rules to Include Certain Significant Market Participants as Dealers
• SEC: Fact Sheet, Final Rules on the Definition of Dealer and Government Securities Dealer