Statement at Open Meeting to Propose Rules Regarding Cross-Border Security-Based Swap Activities
Commissioner Troy A. Paredes
May 1, 2013
Thank you, Chair White. And thank you to the staff – especially those from the Division of Trading and Markets – for all of your hard work on this proposal.
Title VII of the Dodd-Frank Act provides for new regulation of the security-based swap market. The Commission has already initiated several rulemakings in developing the regulatory regime that will come to govern this market. But there is more to fashioning the regime than deciding what the substantive rules ought to be. There is also the question of how to apply the regulation to what is a global security-based swap market.
The recommendation before us takes up this question, advancing a rule proposal regarding the application of Title VII to cross-border security-based swap activity. I am willing to support the recommendation in order to get the benefit of commenters’ input, but I have significant reservations with the proposal. Most notably, I am concerned that international transactions that cut across different countries will be subject to Title VII to too great of an extent, particularly insofar as the proposal extends the reach of Title VII beyond the geographic territory of the United States to regulate activity occurring in other jurisdictions.
Instead of discussing any specifics, let me briefly highlight three of the principal risks that attend the proposal’s application of Title VII to cross-border activity. First, certain foreign market participants may reduce their security-based swap transactions in the U.S. or otherwise steer clear of the U.S. market to avoid being subject to Title VII. Second, some foreign firms may decide to transact less, if at all, with U.S. persons overseas, again so as to be outside Title VII.1 Third, regulatory retaliation could ensue if foreign jurisdictions perceive aspects of the proposed cross-border application of Title VII to be an undue regulatory encroachment. These risks matter because they could lead to less competition in the security-based swap market, a reduction in liquidity, higher transaction costs, and a less integrated global market.
The Commission’s willingness to make substituted compliance determinations will be critical to addressing these and other risks of the proposal, as substituted compliance mitigates the costs, burdens, and uncertainty that can arise when more than one jurisdiction’s regulatory regime is implicated. The proposed substituted compliance framework is constructive and reflects good progress. For example, the framework takes a holistic approach that considers a foreign regulatory regime more broadly instead of undertaking a rule-by-rule comparison; the framework focuses on comparable regulatory outcomes, which can be achieved even if a foreign jurisdiction’s regulation is of a different scope and nature than what the Commission requires under Title VII; and the framework recognizes that markets can be different and that any substituted compliance determination must account for the foreign jurisdiction’s own business practices and market characteristics.
For this framework to yield real results, however, the Commission cannot be reluctant to find that a foreign regulatory regime achieves outcomes comparable to the U.S. “Comparable” does not mean “identical.” Rather, “comparable” contemplates that countries can be committed to a shared set of objectives but decide to achieve them differently. In the interest of international comity and facilitating cross-border activity, we should show proper regard for the judgments of other jurisdictions’ regulators as to what is appropriate for their markets. Furthermore, we cannot get bogged down by so much process that substituted compliance determinations are not forthcoming. The Commission must make its substituted compliance determinations in an efficient and transparent manner to avert the uncertainty that prolonged delays and regulatory opaqueness can cause.
As this rulemaking proceeds, we must ensure that we end up with an approach to cross-border security-based swap activity that is consistent with the principle of international comity and that achieves the benefits of free trade. Commenters’ input will be very helpful in informing my ultimate assessment of the shape a final rule should take. Because of the release’s length and complexity, there is plenty for commenters to address. I am especially interested in hearing commenters’ thoughts on how we can avoid discouraging international transactions; how we can protect against creating competitive imbalances among market participants; and how we can further develop our substituted compliance framework to make it even more workable in practice.
Commenters’ views on Section 30(c) of the Exchange Act would also be worth hearing.2 As the proposing release discusses, the Commission has already received comment suggesting interpretations of Section 30(c) that could impact the scope of the Commission’s authority to regulate cross-border security-based swap activity. Commenters’ perspectives could have a bearing on how one evaluates the appropriateness of the Commission’s proposed cross-border approach, especially in comparison to other conceptions of what a “territorial” approach to applying Title VII to cross-border activity might mean.
In conclusion, I want to once again thank the staff for your dedication and commitment.
1 Regarding these first two risks, the strength of the incentive to avoid Title VII depends, in part, on how burdensome the Title VII regulatory regime proves to be. Non-U.S. persons will be less incentivized to fall outside Title VII’s reach if the substantive regulation implementing Title VII is workable and not unduly costly. Indeed, it may be preferable for the Commission to fashion regulation that foreign firms are not motivated to avoid instead of putting in place a regulatory regime that spurs foreign firms to withdraw from transacting with U.S. persons. Less security-based swap activity might end up being subject to Title VII if the Title VII regime is too burdensome.
2 Section 772(b) of Dodd-Frank added Section 30(c) to the Exchange Act. Section 30(c) provides that “[n]o provision of [Title VII] . . . shall apply to any person insofar as such person transacts a business in security-based swaps without the jurisdiction of the United States, unless such person transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of any provision of [Title VII].”