SEC Issues Proposed Rules on Cross-Border Security-Based Swap Activities

May 06, 2013

On May 1, 2013, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) unanimously voted to propose for comment rules and interpretive guidance for cross-border security-based swap activities (“Proposed Rules”).1 In addition, the Commission approved the reopening of the comment period for certain proposed rulemakings under Title VII of Dodd-Frank (“Title VII”) that have not been finalized. This summary is based on the Open Meeting and a fact sheet that the SEC has issued (a link to which is found at the end of this summary).2 We are preparing an alert with detailed analysis of the Proposed Rules.

At the SEC’s Open Meeting where the Proposed Rules were presented to the Commission, the staff from the Division of Trading and Markets (“Staff”) emphasized that the driving force behind the Proposed Rules is the global nature of the derivatives markets and the policy goals of Title VII.3 Staff noted that because swaps trade continuously in a global market, the Proposed Rules are a necessary component for the SEC’s development of an effective regulatory regime generally, and specifically to those swap transactions over which the SEC has jurisdiction.

Commissioner Elisse Walter spoke most emphatically in favor of the Proposed Rules, calling them pragmatic and flexible. She appreciated that the Proposed Rules recognize that other jurisdictions have regulations in place that may be as effective as those in the U.S. and sought to recognize those efforts. Commissioners Troy Paredes and Luis Aguilar expressed reservation over various aspects of the Proposed Rules, including the potential that international swap transactions with any connection to the U.S. may become subject to Title VII. In addition, they noted that the Proposed Rules could cause non-U.S. swap participants to structure transactions to avoid U.S. persons to the detriment of U.S. investors. Commissioner Paredes, in particular, noted that the SEC must not hesitate to find that foreign jurisdictions achieve a comparable regime, must make efficient and transparent determinations, and must show proper regard to regulators in other jurisdictions.

Commissioner Daniel Gallagher supported the approach taken in the Proposed Rules stating that it represents an effective approach to regulation of global security-based swap transactions. Like Commissioners Paredes and Aguilar, Commissioner Gallagher noted that there are high-quality regulatory regimes comparable to that of the U.S., and security-based swap regulation is not a one-way street.

The comment period for the Proposed Rules will be open for 90 days from the date the SEC’s release is published in the Federal Register. The Commission also unanimously voted to reopen the comment period for other proposed outstanding rules issued under Title VII for a 60-day period. Below please find a brief summary of certain of the Proposed Rules. 

“Substituted Compliance”

The Proposed Rules would take a territorial approach to the applicability of U.S. regulations. This is not the first time that the SEC has taken a territorial approach. However, we anticipate that the Proposed Rules will provide a useful window into the SEC’s general current view of what constitutes activities subject to U.S. jurisdiction. Title VII would apply to security-based swap transactions if the transactions involve (1) a U.S. person,4 or (2) are conducted within the U.S. The proposed definition of “U.S. person”5 would exclude certain multinational financial organizations regardless of where they were organized or where their primary place of business is located. The definition of U.S. person would encompass branches of U.S. banks even if outside the United States, but would not include U.S. branches of foreign banks (unless their home office is otherwise a U.S. person), because the definition would adopt the approach taken in jointly adopted SEC and CFTC rules regarding Title VII entity definitions, and would treat such offices as having the same U.S.-person status as their banks’ home offices.

If Title VII requirements apply to a particular transaction, the Proposed Rules would provide that, under certain circumstances, and at the request of a market participant or group of market participants, the SEC could nevertheless assess whether a market participant may comply with the regulatory requirements of its home country rather than Title VII (“Substituted Compliance”). The Proposed Rules would permit Substituted Compliance if the Commission deems the requirements of the market participant’s home country to be comparable to Title VII in any of four specific categories:

  • Requirements applicable to registered non-U.S. security-based swap dealers.
  • Requirements relating to regulatory reporting and public dissemination of security-based swap data.
  • Requirements relating to mandatory clearing for security-based swaps.
  • Requirements relating to mandatory trade execution for security-based swaps.

Market participants would be able to utilize Substituted Compliance in only those categories the Commission has deemed comparable to Title VII. Staff at the Open Meeting emphasized that this is not intended as a line-by-line, “all or nothing” comparative approach, but rather one that would focus on the broader application of rules, including the supervision of swaps and enforcement of compliance within a given jurisdiction.

The Proposed Rules anticipate that a market participant or group of market participants in a particular non-U.S. jurisdiction would request that the SEC make a Substituted Compliance determination (i.e., compare the foreign jurisdiction’s security-based swap laws, rules and regulations to those in the United States). Once the SEC receives the request, it would collaborate with the requesting parties and the government officials in the particular jurisdiction to consider the request and work towards a recommendation regarding whether Substituted Compliance is appropriate. As noted above, this would not be a rule-by-rule analysis, but rather a look at the broad outcome of the rules to determine whether the foreign regime achieves regulatory outcomes that are comparable to the regulatory outcomes of Title VII. The Commission would have the flexibility to publish the proposed determination for public comment or act directly to grant or deny the Substituted Compliance request. Any decision to grant Substituted Compliance generally would be available to all market participants in that particular jurisdiction.

Going forward, the SEC would retain the authority to revisit determinations as changes or developments occur in jurisdictions that had been considered. This would essentially create an ongoing dialogue in the international community.

Registration of, and Regulatory Requirements Applicable to, Foreign Security-Based Swap Dealers

Security-based swap dealers have to register with the Commission if their “notional amount of dealing transactions conducted within the past 12 months exceed[s] a de minimis level.”6 The Proposed Rules would clarify that, for purposes of the de minimis calculation, foreign security-based swap dealers would only need to include activities conducted with U.S. persons, and activities conducted within the U.S. (excluding transactions with foreign branches of U.S. banks, guarantees received from a U.S. person in connection with a transaction with a non-U.S. person outside the U.S. and certain dealing transactions of affiliates under common control), in their determinations of whether registration is required (i.e., whether they exceeded the de minimis level).

The Proposed Rules also note that foreign security-based swap dealers must comply with entity-level, external business conduct (for their U.S. business7 only) and segregation (for transactions with U.S. person counterparties) requirements, however, they may be able to utilize Substituted Compliance to satisfy the entity-level and external business conduct requirements.

Registration of, and Regulatory Requirements Applicable to, Major Security-Based Swap Participants

Under the Proposed Rules, a non-U.S. person would have to register as a major security-based swap participant if it has security-based swap positions that “it has entered into with U.S. persons, including foreign branches of U.S. banks [and they exceed] . . . a defined substantial position or substantial counterparty exposure threshold” (including certain guaranteed positions).8 Furthermore, foreign major security-based swap participants would be required to comply only with the entity-level regulatory requirements and would not have “to comply with the transaction-level requirements that are specific to major security-based swap requirements in their transactions with counterparties that are non-U.S. persons.”9

Reporting, Dissemination, Clearing and Execution of Transactions on a Swap Execution Facility

The Proposed Rules would require that security-based swap transactions by the following counterparties be reported on a swap execution facility:

  • U.S. persons.
  • Non-U.S. persons who receive a guarantee from a U.S. person.
  • Registered security-based swap dealers.
  • Security-based swap transactions conducted in the U.S.

In addition, under the Proposed Rules, the following security-based swap transactions also would need to comply with the requirements applicable to public dissemination, clearing and trade execution for security-based swap transactions:

  • If a U.S. person is a counterparty (including foreign branches of U.S. banks).
  • If a non-U.S. person who receives a guarantee from a U.S. person is a counterparty.
  • If the transaction is conducted within the U.S., unless an exception applies.

Generally, these transaction-level requirements would not apply to transactions conducted outside the U.S. between the following counterparties:

  • Foreign branches of U.S. banks and unregistered non-U.S. persons that do not receive guarantees from a U.S. person on performance of its security-based swap obligations.
  • Non-U.S. persons that receive guarantees from U.S. persons and unregistered non-U.S. persons that do not receive such guarantees.
  • Non-U.S. persons that are registered security-based swap dealers and non-U.S. persons that do not receive guarantees from U.S. persons.
  • Two non-U.S. persons that are not registered security-based swap dealers neither of which receives a guarantee from U.S. persons.

Registration of Security-Based Swap Clearing Agencies, Execution Facilities and Data Repositories

The Proposed Rules will apply a “territorial approach” to registration of securities-based swap clearing agencies, execution facilities and data repositories. This approach will require each entity to determine whether it performs the relevant infrastructure function within the U.S. The Commission indicated that analysis would include, among other things:

  • Clearing agencies--whether they have one or more U.S. persons as members.
  • Swap execution facilities--whether they provide U.S. persons, or non-U.S. persons located in the U.S., with the direct ability to trade or execute security-based swaps on a foreign security-based swap market.
  • Swap data repositories--whether they receive security-based swap data from U.S. persons, and whether they operate in the U.S.10

The Proposed Rules will address when registration exemptions may be sought by infrastructure entities. The Commission also will propose circumstances when security-based swap data repositories can waive the requirement in Title VII that they receive indemnification agreements from government agencies seeking information from them.

Click here to view the full text of the Proposed Rules.

Click here to view the SEC Press Release and Fact Sheet regarding the Proposed Rules.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:


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 (Release No. 34-69490) (May 1,2013), currently is found on the SEC’s website (a link to which is found above) but is not yet published in the Federal Register.

2 SEC Fact Sheet: Cross-Border Security-Based Swap Activities (May 1, 2013) (“SEC Fact Sheet”).

3 The Commissioners noted that the Proposed Rules are over 1000 pages long with over 2000 footnotes and more than 150 questions for which the SEC is seeking comment.

Commissioners, in providing commentary, noted that the definition of “U.S. person” is not applied evenly to all entity types and while an entity may be a U.S. person for one part of the Proposed Rule, it may not be for another.

5 “U.S. person” would mean: (i) any natural person resident in the U.S.; (ii) any partnership, corporation, trust, or other legal person organized or incorporated under the laws of the U.S. or having its principal place of business in the U.S.; and (iii) any account (whether discretionary or non-discretionary) of a U.S. person.

6 See SEC Fact Sheet.

For non-U.S. persons, “U.S. Business” is defined as “any transaction entered into or offered to be entered into by or on behalf of the foreign security-based swap dealer, with a U.S. person (other than with a foreign branch of a U.S. bank), or any transaction conducted within the U.S.” and for U.S. persons, “U.S. Business” is defined as “any transaction by or on behalf of the U.S.-person security-based swap dealer, wherever it occurs, except for transactions conducted through a foreign branch of a U.S. bank with a non-U.S. person or another foreign branch of a U.S. bank.” See SEC Fact Sheet.

8 See SEC Fact Sheet.

9 See Id.

10 See SEC Fact Sheet.

This article was originally published by Bingham McCutchen LLP.