SEC Adopts Cross-Border Security-Based Swap Rules Regarding Activity in the U.S.
Rules Provide Increased Transparency and Enhanced Oversight; SEC Finalizes Rulemaking in Security-Based Swap Dealing Activity
The final rules are effective 60 days after publication in the Federal Register, but compliance is not required until the latest of either 12 months following publication in the Federal Register or the SBS Entity Counting Date, which was specified in the SBS Entity Registration Adopting Release.
Cross-Border Security-Based Swap Rules Regarding Activity in the United States
SEC Open Meeting
February 10, 2016
The Commission will consider whether to adopt rules to require a non-U.S. company that uses personnel located in a U.S. branch or office to arrange, negotiate, or execute a security-based swap transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer. The rules would help ensure that both U.S. and foreign dealers are subject to Title VII of the Dodd Frank Act when they engage in security-based swap dealing activity in the United States.
This requirement would increase transparency, enhance oversight of firms that carry out a dealing business in the United States, mitigate competitive disparities that could create incentives for market fragmentation, and reduce risks associated with such activity.
The SEC’s final rules specify when certain non-U.S. persons would be required to count a security-based swap transaction with another non-U.S. person toward the requirement to register as a security-based swap dealer based on the dealer’s activity in the United States.
These rules, together with the rules finalized in the SEC’s 2014 cross-border adopting release, would finalize the SEC’s rulemaking with respect to identifying transactions that a firm engaged in security-based swap dealing activity must count toward its dealer de minimis thresholds.
Highlights of the Final Rules
The SEC’s final rules are largely unchanged from its 2015 U.S. activity proposing release. They focus solely on the location of personnel arranging, negotiating, or executing a security-based swap transaction on behalf of the dealer, whether the personnel are employed by the dealer or by the dealer’s agent.
The final rules would require a non-U.S. person using personnel located in a U.S. branch or office to arrange, negotiate, or execute a transaction to include such transaction in its de minimis threshold calculations even if the transaction was executed anonymously and cleared. The final rules would also except those international organizations that are excluded from the definition of U.S. person in Exchange Act rule 3a71-3(a)(4)(iii) from the requirement that non-U.S. persons include in their dealer de minimis threshold calculations transactions that they arrange, negotiate, or execute using personnel located in a U.S. branch or office.
The final rules would not address other elements of the U.S. activity proposing release, including the application of business conduct standards or Regulation SBSR to certain transactions, and clearing and trade execution requirements more generally. The SEC anticipates addressing U.S. activity in connection with these requirements in subsequent releases.
Dodd-Frank Act – The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established a comprehensive framework for regulating the over-the-counter derivatives market. Title VII of the Dodd-Frank Act gave the SEC regulatory authority over security-based swaps and certain key players in that market, including security-based swap dealers and major security-based swap participants. Among other things, Title VII amends the Securities Exchange Act of 1934 to address the registration and regulation of security-based swap dealers, including the establishment of business conduct standards for such dealers; the reporting and public dissemination of security-based swap data; and the mandatory clearing and trade execution of certain security-based swaps.
Cross-Border Security-Based Swap Market – The security-based swap market often involves counterparties located in different countries. According to data analyzed by SEC staff, a majority of transactions involving single-name credit default swaps on U.S. reference entities involve one or more counterparties located abroad. Based on staff estimates, 12 percent of global notional volume between 2008 and 2014 was between two U.S.-domiciled counterparties. This compares to 48 percent entered into between one U.S-domiciled counterparty and one foreign-domiciled counterparty, and 40 percent entered into between two foreign-domiciled counterparties. However, the data also show that in approximately 83 percent of transactions on U.S. reference entities, one or both counterparties are affiliated with a U.S. financial group. In addition, some security-based swaps may be negotiated and executed in two different countries and then booked in other countries. Finally, the security-based swap market is largely an inter-dealer market. Commission staff estimates that nearly 75 percent of notional volume has International Swaps and Derivatives Association (ISDA)-recognized dealers as counterparties on both sides of the transaction.
U.S. Activity Proposing Release – In April 2015, the SEC proposed rules to identify when a non-U.S.-person dealer using personnel located in a U.S. branch or office to engage in security-based swap dealing activity would trigger certain requirements under Title VII, including: the requirement to count security-based swap transactions with another non-U.S. person toward the requirement to register as a security-based swap dealer; the requirement to make certain disclosures and fulfill other obligations pursuant to Title VII’s external business conduct standards; and to report a security-based swap transaction to a registered security-based swap data repository and publicly disseminate the transaction under Regulation SBSR. The SEC said that it was not proposing to use U.S. activity to trigger application of the Title VII clearing or trade execution requirements.
Action by the CFTC – In November 2013, the CFTC staff issued a staff advisory addressing the applicability of certain CFTC requirements to swap activity by non-U.S. registered swap dealers arranged, negotiated, or executed by personnel or agents of the non-U.S. swap dealer located in the United States. The CFTC subsequently requested comment on the staff advisory and both the staff advisory and comments received on it are under review at the CFTC.
If approved for publication by the Commission, the rules will be published on the Commission’s website and in the Federal Register. They will become effective 60 days after publication in the Federal Register. However, compliance will not be required until the latest of either 12 months following publication in the Federal Register or the SBS Entity Counting Date, which was specified in the SBS Entity Registration Adopting Release.