Cross-Border Security-Based Swap Transactions: When Would Registration as a Security-Based Swap Dealer Be Required?

July 11, 2013

In May, the Securities and Exchange Commission (“SEC” or “Commission”) proposed rules to govern security-based swap dealers engaged in cross-border security-based transactions (“Proposed Rules”).1 The Proposed Rules are extensive, and navigating their potential application can be confusing. The summary below, along with the attached corresponding flow charts, is intended to provide participants in security-based swap transactions an overview of the potential impact of the Proposed Rules if the Proposed Rules are adopted in their current form.2 While the SEC is considering comments on the Proposed Rules, the Commodity Futures Trading Commission ("CFTC") has adopted rules that are not wholly consistent with the approach taken by the SEC in the Proposed Rules. The CFTC will be considering its approach to cross-border swap activities again on Friday, July 12, 2013. Comparison of the CFTC Rules, after its meeting on July 12, to the Proposed Rules will again be critical for those entities engaging in cross-border transactions in both security-based swaps and non-security-based swaps.

Comments on the Proposed Rules are due by August 21, 2013 (ninety days after the publication of the Proposed Rules in the Federal Register which occurred on May 23, 2013). The Flow Charts in Appendix A are intended as a tool in helping understand when registration and/or reporting would apply to security-based swap activity.

See the attached Overview Chart for a summary of the analysis set forth in the Proposed Rules.

Step 1: Determining status

As an initial step in considering the Proposed Rules, a person must first determine if it even meets the basic definition of a security-based swap dealer or major security-based swap participant.3

Security-based swap dealer. Pursuant to the statutory definition found in Dodd-Frank,4 an entity is a security-based swap dealer if it is a person that (i) holds itself out as a dealer in security-based swaps; (ii) makes a market in security-based swaps; (iii) regularly enters into security-based swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing it to be commonly known in the trade as a dealer or market maker in security-based swaps.5

The SEC and CFTC have further interpreted the definition to include the following activities as those of a security-based swap dealer:

  • Providing liquidity to market professionals or other persons in connection with security-based swaps;
  • Seeking to profit by providing liquidity in connection with security-based swaps;
  • Providing advice in connection with security-based swaps or structuring security-based swaps;
  • Having a regular clientele and actively soliciting clients;
  • Using inter-dealer brokers, and
  • Acting as a market maker on an organized security-based swap exchange or trading system.6

See the Overview Chart for assistance with determining whether activities would cause an entity to be a security-based swap dealer.

Major security-based swap participant. The Dodd-Frank Act defines a major security-based swap participant as an entity if (i) it maintains a substantial position in security-based swaps; (ii) its security-based swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. banking system or financial markets; or (iii) it maintains a substantial position in security-based swaps, highly leveraged to the amount of capital that it holds, and is not subject to capital requirements by a federal banking agency.

The Proposed Rules and the attached charts provide guidance on whether transactions count towards an entity’s security-based swap position and thus, contribute to its status as a major security-based swap participant. The Proposed Rules, for example, would treat security-based swap positions differently from guarantees of security-based swaps. Consequently, market participants would have to review their transaction data in light of the Proposed Rules to determine whether they comply.

See Chart 1 for guidance on the definition of a major security-based swap participant.

Step 2: Are you a U.S. person or a non-U.S. person?

If an entity determines that it is a security-based swap dealer or a major security-based swap participant, it must consider whether registration with the SEC would be necessary under the Proposed Rules. An initial step in making this determination should be to consider whether it is a U.S. person or non-U.S. person under the Proposed Rules. U.S. and non-U.S. persons would use different criteria to calculate their security-based swap activity.

See Chart 2 to determine if you would be a U.S. person under the Proposed Rules.

Step 3: Do you exceed the de minimis threshold of security-based swap transactions?

If an entity participates in security-based swap transactions, it would be required to register as a security-based swap dealer if the amount of its security-based swap transactions exceeds the de minimis threshold in the definition. The Proposed Rules describe how an entity would have to calculate whether it meets the de minimis threshold.

A U.S. person that is a security-based swap dealer would have to consider all of its business — foreign and domestic — to determine whether it exceeds the threshold for activity requiring registration.

A non-U.S. person that is a security-based swap dealer would consider only the business it conducts in the United States or with U.S. persons in determining whether it exceeds the threshold for registration.

See Chart 3 for guidance on the proposed de minimis threshold that would be used to assess status and registration requirements.

Step 4: If you are required to register, is substituted compliance available?

The SEC in the Proposed Rules strived to avoid imposing duplicative or conflicting compliance obligations on non-U.S. persons. Accordingly, the Proposed Rules would allow non-U.S. security-based swap dealers or non-U.S. market participants to satisfy U.S. regulations by complying with rules in their home countries. Under the Proposed Rules, the SEC would assess whether a foreign regulatory system achieves regulatory outcomes in particular categories of requirements comparable to U.S. requirements. Such an approach would allow substituted compliance in certain categories, even when the entire foreign regulatory regime is not comparable to the SEC’s policy objectives. In addition, the Proposed Rules may allow for substituted compliance with entity-level and transaction-level requirements. The Proposed Rules include charts to help determine when substituted compliance may be available for these requirements.

Click here to review the information provided by the SEC in the Proposed Rules regarding the contemplated application of Substituted Compliance and its impact on entities.

Step 5: Is regulatory reporting of your security-based swap dealing activity required?

Even if a security-based swap dealer or major security-based swap participant need not register, it may be subject to regulatory reporting requirements. Such a requirement likely would affect non-U.S. persons doing business overseas with other non-U.S. persons, backed by a U.S. guarantor. The Proposed Rules adhere to the general maxim in the Dodd-Frank Act to add transparency to the swaps market. The Proposed Rules, therefore, would require regulatory reporting to a security-based data repository of any security-based transaction (i) conducted within the United States; (ii) with a U.S. person as a direct counterparty; (iii) with a U.S. person as a guarantor on either side of the transaction; (iv) where either direct counterparty is a security-based swap dealer or major security-based swap participant; (v) where a guarantor is a security-based swap dealer or major security-based swap participant; or (vi) cleared through a U.S. clearing agency.

See Chart 4 for an overview of the proposed regulatory reporting requirements.


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1 Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, RIN 3235-AL25 (initial release date May 1, 2013) available at

2 The attached charts focus on the parties to a security-based swap transaction and do not address how the Proposed Rules would apply to swap execution facilities, clearing agencies and swap data repositories.

3 Any investment companies (registered and unregistered funds) that engage in security-based swap transactions, depending on their use of security-based swaps, may want to assess periodically whether they are major security-based swap participants. In addition, funds should be aware that many of their counterparties and dealers in security-based swap transactions will be subject to rules that the SEC ultimately adopts for security-based swap dealers and major security-based swap participants.

See section 761 of the Dodd-Frank Act (adding Section 3(a)(71) of the Exchange Act, 15 U.S.C 78c(a)(71), to define “security-based swap dealer”).

See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012).

See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012).

This article was originally published by Bingham McCutchen LLP.