Monday, February 29, 2016

SEC Expects its Cross-Border Swaps Regulations to "Level the Playing Field"

On February 10, 2016, the Securities and Exchange Commission approved final rules intended to ensure that both U.S. and foreign dealers are subject to U.S. regulation when they engage in security-based swap dealing activity in the United States. The new rules require non-U.S. companies that uses personnel located in a U.S. branch or office to arrange, negotiate, or execute a security-based swap transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer.

 

According to SEC Chair Mary Jo White, the final rules increase transparency, enhance oversight of firms that carry out a dealing business in the United States, address competitive disparities that could result in market fragmentation, and reduce overall risks associated with cross-border swap transactions. 

 

“These final rules are integral to the SEC’s regulation of the security-based swap market, marking a key milestone in the completion of our regime for overseeing dealers. . . The rules should improve transparency and enhance stability and oversight in the security-based swap market, while reducing potential competitive disparities, lessening the likelihood of market fragmentation, and mitigating the risk that may flow into U.S. financial markets.”  

 

 The final regulations are solely location-based.  Under these new rules, non-U.S. persons using personnel located in a U.S. branch or office to arrange, negotiate, or execute a transaction must include these transactions in its de minimis threshold calculations even if the transaction was executed anonymously and cleared.  The de minimis threshold calculation is used to determine whether a swaps participant is required to register with the SEC as a security-based swap dealer based on the dealer’s activity in the United States. Including these cross-border transactions in the calculation is intended to level the playing field between U.S. security-based swap dealers and non-U.S. swaps dealers with a material business transacted in the U.S.  The rules should sweep more non-U.S. security-based swaps dealers into the SEC’s regulatory ambit, thereby subjecting more of the global business to consistent registration and regulatory requirements.  

 

The final rules do provide an exception for international organizations that are excluded from the definition of U.S. person in Exchange Act rule 3a71-3(a)(4)(iii).  In addition, the SEC notes that these new rules do not address such matters as including the application of business conduct standards or Regulation SBSR to certain transactions, and clearing and trade execution requirements more generally. The SEC anticipates addressing U.S. activity in connection with these requirements in subsequent releases.

 

In connection with cross-border activity for non-security-based swaps, the CFTC has reopened its comment process.  In November 2013, the CFTC staff issued a staff advisory addressing the applicability of certain CFTC requirements to swap activity by non-U.S. registered swap dealers arranged, negotiated, or executed by personnel or agents of the non-U.S. swap dealer located in the United States.  The CFTC subsequently requested comment on the staff advisory and both the staff advisory and comments received on it are under review at the CFTC, with new proposals expected in upcoming months.

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