Commissioner Elisse B. Walter
May 1, 2013
One credit default swap. Two parties. One is in Chicago, the other is in Frankfurt. They negotiate the transaction through traders and sales personnel in New York, then book the trade in each company’s London affiliate.
In the world of security-based swaps, the type of transaction that I just described is the norm, not the exception.
Indeed, security-based swaps and other derivatives trade continuously in a truly global market – making cross-border rules not just a component of OTC derivatives regulation, but the heart of that regulation.
That is why today’s action is the lynchpin to the SEC’s development of security-based swap regulation.
The release that the Commission proposes today is the result of countless hours of work by the staff – carefully considering the issues that cross-border transactions pose, discussing these issues with our domestic and foreign regulatory counterparts, and drafting this holistic cross-border approach to all of the Commission’s proposed security-based swaps regulations.
And, it marks an important step in the Commission’s implementation of security-based swap regulation. As we have stated, the Commission considered the discussion of cross-border issues to be so vital to the rest of the Title VII framework that we committed to issuing this release for notice and comment before proceeding with implementation of Title VII. Along with the cross-border release, I am pleased that we are reopening the comment period for other Title VII releases, and I look forward to working with the staff to proceed with the adoption of these rules expeditiously.
Given its breadth, today’s cross-border release may seem complex, but the approach it describes is not. We are taking a common sense approach to determining when U.S. requirements apply to non-U.S. entities and cross-border transactions.
A key component to the Commission’s proposed approach is substituted compliance – that is, allowing a foreign entity to satisfy the Commission’s requirements in a particular area – such as capital or risk management – by complying with comparable requirements in its home jurisdiction. As you might be aware, I have had opportunities in recent weeks to discuss the principles of substituted compliance, and I have continued that dialogue in conversations with my foreign and domestic regulatory counterparts. What strikes me about the substituted compliance approach that staff has devised is that it is pragmatic and flexible. It recognizes the cross-border nature of the security-based swap market and the ongoing efforts by other jurisdictions to create a regulatory regime in this space. It will allow the Commission to permit substituted compliance when another regime achieves comparable regulatory outcomes in a particular area of its regime, while allowing the Commission to require compliance with our regulations if another area of the foreign regime does not achieve regulatory outcomes comparable to outcomes under our requirements. In other words, we are not proposing an “all or nothing,” approach, but instead an approach that recognizes that different jurisdictions will have different regulatory approaches, philosophies, and time frames. Underscoring the pragmatic nature in this approach, the release emphasizes that the Commission expects to undertake substituted compliance determinations by looking at comparable regulatory outcomes, not a line-by-line comparison of rules.
Finally, and of particular importance to me, the Commission will review how the jurisdiction supervises and enforces compliance with its rules when determining whether to permit substituted compliance, and we will retain examination and enforcement authority even after a substituted compliance determination is made. This aspect of substituted compliance is crucial because effective supervision and enforcement is key not only to achieving the goals of the Dodd-Frank Act, but also to advancing the SEC’s core mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
To the staff – to say that I applaud you for your efforts would be a tremendous understatement. I know the intense work that so many of you put into this. And I congratulate you on a product that is thorough, thoughtful, and pragmatic. And to my domestic and foreign regulatory colleagues, who are also tackling these same issues: I hope that you are encouraged by this release and agree that it promotes a realistic path forward to regulating a global OTC derivatives market. In the coming weeks, I look forward to hearing the views of the public and my fellow regulators from around the globe concerning the ideas and approaches put forward in this release, and I hope that such ideas and approaches can serve as a foundation for moving ahead.