Regulation

SEC adopts cross-border security-based swap rules

The Securities and Exchange Commission (SEC) has adopted the first of a series of rules and guidance on cross-border security-based swap activities for market participants. 

The new rules will be key to finalising the remaining proposals. 
 
The rules and guidance explain when a cross-border transaction must be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant.  The rules also address the scope of the SEC’s cross-border anti-fraud authority. 
 
The SEC also adopted a procedural rule regarding the submission of “substituted compliance” requests.  This rule represents a first step in the SEC’s efforts to establish a framework to address the possibility that market participants may be subject to more than one set of comparable regulations across different jurisdictions as a result of their cross-border swaps activity.  If the SEC were to grant a request for substituted compliance, it would permit market participants to satisfy certain Title VII security-based swap regulatory requirements by complying with comparable non-US rules.
 
“The rules we adopted today have been strengthened to the extent feasible under existing law while increasing their clarity and workability for market participants,” says SEC chair Mary Jo White.  “The rules lay the foundation for an expansive, robust approach to the potential risk to US market participants and the US financial system from security-based swap activities.”
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010.  Title VII established a framework for regulating the over-the-counter derivatives market.
 
In future rulemakings on specific security-based swap requirements such as reporting of transactions to security-based swap data repositories, the SEC intends to address the cross-border application of these requirements, and when “substituted compliance” may be available for them.  Under the SEC’s contemplated approach to implementation of these security-based swap regulatory requirements, market participants would be made aware of both the domestic and cross-border aspects of these regulatory requirements before being required to comply with them. 
 
The SEC also anticipates soliciting additional public comment on approaches by which the cross-border application of the security-based swap dealer definition appropriately can reflect policy concerns related to transactions involving two non-US person counterparties where activity related to those transactions occurs at least in part within the US.  The SEC believes that the final resolution of this issue can benefit from further consideration and public comment, in light of the significant issues raised by commenters related to the proposed requirement.
 
The rules adopted today will be effective 60 days after their publication in the Federal Register.  However, the rules addressing the application of the dealer and major participant definitions, and the procedures for submitting substituted compliance requests, will not impose requirements on market participants until after relevant substantive rulemakings have been completed.

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