Chair’s Opening Statement on the Adoption of Cross-Border Securities-Based Swap Rules under Title VII of the Dodd-Frank Act
Chair Mary Jo White
June 25, 2014
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on June 25, 2014.
Today, the Commission will consider a recommendation of the staff to adopt core rules and critical guidance on cross-border security-based swap activities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Title VII of the Dodd-Frank Act created an important and entirely new regulatory framework for the over-the-counter derivatives market. Transforming this framework into a series of strong rules is one of the most important tasks remaining before the Commission in discharging our responsibility to address the lessons of the last financial crisis. The events of 2008 and 2009 — and the significant role derivatives played in those events — still reverberate throughout our economy.
Properly constructed, the Commission’s rules under Title VII should mitigate significant risks to the U.S. financial system, bring transparency to previously opaque bilateral markets, and provide critical new protections for swap customers and counterparties. And the vital regulatory protections of Title VII are not confined to large multi-national banks and other market participants — they are also essential to preserving the stability of a financial system that is vital to all Americans.
As we proceed with robust to robustly carry out the objectives of Title VII, we must, at the same time, do so with a clear understanding and appreciation of the limitations within which we operate. The reach of our statutory authority, actions by other supervisors in the global market, and close consultation and coordination with our colleagues at the CFTC are among the considerations that must also guide our approach.
The Commission has already adopted a number of the foundational rules under Title VII. And I have asked the staff to advance their recommendations on the remaining rules in parallel, guided by the Commission’s 2012 “roadmap” for implementing Title VII. Consistent with that roadmap, we will next look to consider a recommendation on security-based swap transaction reporting and the registration and regulation of security-based swap data repositories. It is critical that we proceed expeditiously to complete the establishment of a strong, enduring set of rules to govern the security-based swaps market that will guide investors and other market participants for years to come.
The security-based swap market is global, with most transactions taking place across jurisdictional lines. Without clarity on how the Commission’s regulatory framework will apply to cross-border activities, implementation of the Title VII requirements would fall short of achieving the statute’s important regulatory policy goals. The final rules and guidance on cross-border coverage and operability that we are considering today lay the foundation for moving forward on our remaining Title VII rules.
Last year, the Commission published a comprehensive proposal mapping out the cross-border application of the various substantive requirements in Title VII. That proposal set forth our preliminary thinking on cross-border issues across the full range of regulatory categories and requirements under Title VII.
Today’s final rules and guidance implement a central piece of that proposal, defining who is — and who is not — covered by our regulatory regime. Among other things, they specify when market participants engaged in cross-border swaps activity may be subject to SEC regulation as dealers or major participants. And they define a number of pivotal terms — such as a “U.S. person” — that cut across Title VII’s cross-border landscape.
Drawing on thoughtful and detailed comments, the final rules and guidance have been substantially strengthened from our 2013 proposal to better protect the U.S. financial system from the risks that can be posed by security-based swap activity. Among other things, they include robust additional limits on unregulated activity by U.S. firms acting through their branches and affiliates established abroad, as well as enhancements to ensure that private funds do not circumvent the intended ambit of Title VII.
I particularly welcome the expanded approach reflected in the final rules and guidance with respect to guaranteed foreign affiliates of U.S. financial institutions. The approach we take in these final rules addresses the potential risks posed by those operations to the extent feasible under our statutory authority, and I am grateful for the care with which the staff worked within these limitations to help ensure that the objectives of Title VII are fulfilled.
It is worth highlighting two key aspects of the final rules:
- First, a guaranteed foreign affiliate of a U.S. person — the foreign dealing operations of a U.S. financial institution, for example — must now consider all of its security-based swap activity subject to a U.S. guarantee in assessing whether it is a dealer within the Commission’s regulatory oversight. Where there is a guarantee in place with respect to that activity, there are no distinctions for these purposes between activity directed toward the U.S. and activity directed abroad.
- Second, what constitutes a “guarantee” has been clarified in important ways. In general, a U.S. person guarantees any security-based swap where there is a legally enforceable right of recourse against the U.S. person — conditional or unconditional, in whole or in part, oral or written, by contract or statute. For many financial arrangements, this clarification will help ensure that the legal treatment of a guarantee under Title VII is not out of line with economic reality.
These enhancements are important. But, as the proposal makes clear, they may not capture all of the risks of the vast cross-border derivatives market that may flow back to the United States. As public reports have recently highlighted, for example, some U.S. financial firms are “de-guaranteeing” their foreign affiliates. To the extent that the new financial arrangements do not create a legally enforceable right of recourse against a U.S. person, our rules may not bring these affiliates within our regulatory oversight due to the limits of our statutory authority. We will work with our fellow regulators here and abroad to actively monitor these and other developments and the potential exposure of the United States — and work to develop and use our collective powers to address them as necessary.
In addition to strengthening a number of the aspects of our proposed rules, these final rules and guidance also significantly increase the clarity and workability of our requirements and guidance for market participants, taking particular care to ensure that they are compatible to the extent possible with the CFTC regime. The final rules provide extensive guidance on the questions and issues raised by commenters with respect to both technical and substantive matters. They provide a practical, balanced framework that can be readily followed in today’s markets. I am very pleased to support the staff’s recommendation and highly commend their exceptional work.
Before I ask Steve Luparello, Director of the Division of Trading and Markets, to discuss the proposed rules, I would like to name some names and thank Steve, his Deputy Director, Jim Burns, and Steve’s counsel, Donna Chambers, for their leadership on this rulemaking. I would also like to express my deep gratitude to the core rulemaking team for all of their hard work on this extraordinarily complex rulemaking over many months: Brian Bussey, Richard Gabbert, Josh Kans, and Margaret Rubin from the Division’s Office of Derivatives Policy, and Jennifer Marietta-Westberg, Vanessa Countryman, Adam Yonce, and Narahari Phatak from the Division of Economic and Risk Analysis.
Many thanks as well to Annie Small, Meridith Mitchell, Michael Conley, Lori Price, Robert Bagnall, Brooks Shirey, Cynthia Ginsberg, and Maureen Johansen from the Office of the General Counsel, and Sara Crovitz, Michael Didiuk, and Rachel Loko from the Division of Investment Management. They provided substantial and very thoughtful assistance over many months to help make the adopting release both a strong and valid exercise of the Commission’s Title VII authority under the Dodd-Frank Act.
In addition, I would like to thank many other staff throughout the agency for their contributions, including Jim Giles, John Polise, Connie Kiggins, David Bloom, Christine Sibille, and Vivi Mazarakis from the Office of Compliance Inspections and Examinations; Eric Pan and Shaheen Zuver from the Office of International Affairs; Amy Starr, Andrew Schoeffler, and Paul Dudek from the Division of Corporation Finance; Chuck Dale and Anne Yang from the Division of Economic and Risk Analysis; Charlotte Buford and Kerry Knowles from the Division of Enforcement, and Carol McGee, Kim Allen and Laura Compton from the Division of Trading and Markets.
Finally, I would like to express my tremendous gratitude to my fellow Commissioners and all of our counsels for their engagement and comments on the final rules.