On May 11, 2022, SEC Chair Gary Gensler delivered prepared remarks at the International Swaps and Derivatives Association’s (ISDA) annual meeting. Mr. Gensler noted the emergence of swaps in the 1980s as a tool for market participants to lock in prices of underlying instruments and rates and recognized that a well-functioning swap market benefits the economy. However, highlighting the role swaps played in the 1998 failure of Long Term Capital Management, the 2008 financial crisis and the 2021 failure of a large family office, he emphasized the importance of the implementation of swap market reform under Dodd-Frank, including with respect to security-based swaps over which the SEC has authority. In this regard, he discussed the SEC’s ongoing efforts to propose and adopt rules to promote risk reduction, transparency and integrity in markets for security-based swaps.

Mr. Gensler also discussed the use of derivatives in connection with crypto assets. He reiterated the SEC’s view that most crypto tokens are securities subject to the SEC’s jurisdiction, meaning that offerings to retail investors must be registered with the SEC and effected on a national securities exchange and that swap transactions based on crypto assets are security-based swaps subject to SEC regulation. He noted that ISDA is developing legal standards for crypto derivatives and that the SEC has brought, and will continue to bring, enforcement actions involving retail offerings of crypto-related security-based swaps.

Finally, Mr. Gensler discussed the use of derivatives in structured and complex investment products, including leveraged and inverse ETFs and products linked to volatility indices. He stated that these products can pose significant risks even to sophisticated investors and have the potential to create system-wide risks during periods of market volatility or stress. Highlighting recent enforcement actions, he emphasized that firms offering these products to the public must comply with regulatory requirements related to marketing and sales practices, valuation and risk management, and that although the listing and trading of these products may be consistent with the federal securities laws they may not be appropriate for all investors. Furthermore, he noted the impending compliance date for Rule 18f-4, the SEC’s derivatives rule, and that he has asked the SEC staff to focus on the use of derivatives by registered investment companies to ensure they are in compliance with applicable rules.

Mr. Gensler’s remarks are available here.