The SEC is considering regulating swap execution facilities due to their potential impact on market stability.

The Securities and Exchange Commission has unanimously decided to propose a rule for the registration and regulation of security-based swap execution facilities.

An electronic trading platform known as a swap execution facility (SEF) enables participants to purchase and sell swaps. A swap involves the exchange of cash flows or liabilities from two distinct financial instruments between two parties.

Swaps are a significant component of the derivatives market, and they are utilized to manage risk. For instance, one of the most substantial markets involves interest rate swaps, where one stream of future interest payments is exchanged for another.

You can also use swaps to manage market risk.

The CFTC oversees futures swaps, including interest rate swaps, under the Dodd-Frank Act.

The great financial crisis raised concerns about systemic risk due to the difficulty in determining the size and nature of trading.

The CFTC monitored and regulated swap futures through a platform provided by futures-based swap execution facilities, with Gary Gensler being a critical player at the time as the head of the CFTC.

Gensler, now head of the SEC, is attempting to establish rules for securities-based swaps that are similar to those currently in place.

There is an equal concern that equity swaps may be a systemic risk.

The issue with Archegos Capital Management in 2021 mainly centered around a "total return swap" instrument, which involved a contract where one party made payments based on a fixed rate while the other party made payments based on the total return of an underlying asset, primarily ViacomCBS stock.

Archegos' income came from the assets it held, and it was not obligated to reveal its holdings to regulatory bodies or other parties. However, when ViacomCBS' stock price began to decline, Archegos, which had been using leverage, received margin calls it couldn't meet, resulting in a massive sale of its assets.

To enhance transparency, the SEC is proposing rules that mandate registration of security-based swap trading platforms.