Gary DeWaal and Associates LLC

SEC Proposes Rules for Cross-Border Security-Based Swap Activities

News Developments   
Published Date: May 01, 2013

On 1 May 2013, the SEC proposed rules and interpretive guidance to facilitate cross-border security-based swap activities.  This comes almost six months after the CFTC issued its final exemptive order on the cross-border application of certain of its swap regulations on December 21, 2012 (effective through July 12, 2013).

According to a Fact Sheet provided today by the SEC  (the full proposed rules and interpretive guidance were not available at the time of this writing; subsequently they became available. See link below), the agency's proposals generally advocate for a substituted compliance framework, acknowledging the global nature of the derivatives market. Although there appears to be some overlap in approach with the CFTC, the SEC's approach appears to more fully acknowledge and accept that there are alternative, yet comparable regulatory schemes outside the USA, and that regulators should avoid "...conflicting or costly duplicative regulatory requirements." The SEC proposes to assess comparability not based on a rule by rule analysis, but looking at the regulatory outcome of another regulatory approach holistically.

The SEC has jurisdiction over security based swaps which generally are swaps related to a single security, loan or issuer of securities, a narrow-based security index, or the occurrence of certain events related to a single issuer or issuers of securities in a barrow-based security index with a USA nexus. A US nexus generally means the relevant swaps are entered into with US persons or conducted within the USA (ie, negotiated, executed or booked within the USA by or on behalf of either party to the transaction regardless of the location, domicile or residence status of either counterparty to the transaction). Other types of swaps with a US nexus are generally under the jurisdiction of the CFTC.

The SEC definition of US person appears different than that adopted by the CFTC. For the SEC, a US person is proposed to be

  1. any natural person resident in the USA;
  2. any partnership, corporation, trust or other legal person organized or incorporated under the laws of  the USA or having its principal place of business in the USA; or
  3. any account (whether discretionary or non-discretionary) or a USA person.
  4. certain multinational financial organizations would not be treated as US persons regardless of where they are organized or located, and US branches of foreign banks would not be US persons either; like under the CFTC Order, foreign branches of banks would have the same US person status of the bank's home office.

However, if Title VII applies to a security-based swap transaction because of a USA nexus, foreign market participants may comply with foreign regulatory requirements instead of SEC requirements -- so called "substituted compliance." This would be permitted where the foreign requirements holistically achieve regulatory outcomes comparable with the relevant provisions of Title VII of Dodd Frank.

In assessing comparability, the SEC will consider four categories; where the SEC determines that there is comparable regulation in a category, it will permit substituted compliance with respect to such category; it is expressly not adopting "an all-or-nothing approach." The four categories are requirements:

  1. applicable to registered non-US security based swap dealers;
  2. regarding regulatory reporting and public dissemination of security-based swap data;
  3. regarding mandatory clearing; and
  4. regarding mandatory trade execution.

As with the CFTC, the SEC proposes that, ordinarily, non-US based swap dealers comply with both its entity level (eg, capital, margin, and risk management requirements) and, in connection with their US business, transaction level (eg, external business conduct standards) requirements. However, a non-US based security-based swap dealer may be able to rely on comparable requirements locally in connection with both entity and transaction level requirements (except for segregation requirements with respect to transactions with US persons). The CFTC only exempted non-US based swap dealers from compliance with entity level requirements during the tenure of its Order.
Separate requirements and exemptions apply to foreign Major Security-based Swap Participants.

In addition, the SEC also proposed a rule and interpretive guidance regarding when non-US based security-based swap infrastructures (ie, clearing agencies, swap execution facilities and swap data repositories) must register with it, as well as the availability of exemptions when such entities are subject to comparable regulation in their home country.

The comment period for the SEC's proposal is 90 days following publication in the Federal Register.

For more information see

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of May 1, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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