The SEC unanimously voted to propose rules and interpretive guidance for parties to cross-border security-based swap transactions. The proposal sets out the SEC’s “preliminary views” regarding which regulatory requirements would apply when a security-based swap transaction takes place partially within and partially outside the United States. It also addresses registration of certain entities.
The proposal would generally subject security-based swap transactions to the applicable SEC rules if they are entered into with a U.S. person or conducted within the United States. “U.S. person” would be defined to mean: any natural person resident in the United States; any partnership, corporation, trust, or other legal person organized or incorporated under the laws of the United States or having its principal place of business in the United States; or any account, whether discretionary or non-discretionary, of a U.S. person. Transactions “conducted within the United States” would be defined to mean any security-based swap transaction that is solicited, negotiated, executed, or booked within the United States by or on behalf of either counterparty to the transaction, regardless of the location, domicile, or residence status of either counterparty to the transaction. However, the term would exclude a transaction conducted through a foreign branch of a U.S. bank.
As with the proposed CFTC guidance, the proposed SEC rules divide the requirements of security-based swap dealers into “entity-level requirements” (including capital, margin, and risk management requirements) and “transaction-level requirements” (such as external business conduct requirements and segregation requirements applicable to the security-based swap dealer’s individual transactions). The proposal would require registered foreign security-based swap dealers and foreign branches of registered U.S. security-based swap dealers to comply with the SEC’s entity-level requirements subject to the substituted compliance framework discussed below, but would generally require them to comply with external business conduct requirements and segregation requirements only with respect to transactions with U.S. persons. U.S. security-based swap dealers would also generally not be required to comply with external business conduct standards with respect to security-based swap transactions conducted though their foreign branches with non-U.S. persons.
However, the proposal includes a “substituted compliance” framework that would allow a security-based swap dealer to satisfy certain entity-level requirements by complying instead with the requirements of a foreign regulatory regime. The release states that the “availability of substituted compliance should reduce the likelihood that market participants would be subject to potentially conflicting or duplicative sets of rules.” The ability to use such substituted compliance would depend on whether the SEC has determined the relevant foreign regulations to be comparable to U.S. regulatory requirements. Such comparability would be determined separately in four different categories:
- requirements applicable to registered non-U.S. security-based swap dealers;
- requirements relating to regulatory reporting and public dissemination of information on security-based swaps;
- requirements relating to clearing for security-based swaps; and
- requirements relating to trade execution for security-based swaps.
A particular foreign regulatory regime may be deemed comparable with the U.S. requirements in some categories but not others, in which case substituted compliance would be available only for regulations in the categories deemed comparable. Comparability determinations would be made on a holistic basis rather than a rule-by-rule comparison.
The release explicitly states that the SEC is not currently proposing to extend the substituted compliance framework to major security-based swap participants. The release explains that major security-based swap participants are a potentially diverse group of entities that may be engaged in a variety of industries, and as a result “it is not clear what types of entity-level regulatory oversight, if any…a foreign major security-based swap participant would be subject to in the foreign regulatory system.” The release suggests that the SEC will consider re-evaluating this in light of comments and other new information it receives in the future.
Non-U.S. entities would only need to include security-based swap transactions conducted with U.S. persons (other than with foreign branches of U.S. banks) or conducted within the United States towards the de minimis threshold calculations included in the “security-based swap dealer” definition. A U.S. person, in contrast, would be required to count all of its security-based swap transactions conducted in a dealing capacity, including those conducted through a foreign branch, for purposes of the “security-based swap dealer” definition. Similar rules would apply to the “major security-based swap participant” definition.
The proposal also addresses whether clearing agencies, security-based swap data repositories, and security-based swap execution facilities must register with the SEC. It would generally require such entities to register if they are U.S. persons or if they perform their relevant function within the United States, although the release does propose or contemplate certain exemptions from the registration requirement.
The proposal also includes proposed additions or changes to certain other proposed rules, such as the security-based swap reporting requirements.
Comments on the proposed rules and interpretive guidance are due no later than August 21, 2013.
In a related action, the SEC also unanimously voted to reopen the public comment period for all SEC rules not yet finalized that pertain to Title VII of the Dodd-Frank Act to permit re-evaluation of those proposals in light of the cross-border proposal. The re-opened comment period expires July 22, 2013.