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Statement at Open Meeting Regarding Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities

Commissioner Michael S. Piwowar

June 25, 2014

Thank you, Chair White.

I am pleased to support the rulemaking before us today, which would specify how the “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” definitions from Title VII of the Dodd-Frank Act are applied to cross-border security-based swap activities. These two definitions are foundational elements of the Commission’s new regulatory regime governing security-based swaps, specifying which entities will be required to register with the Commission as a result of their security-based swap activities, and thus be subjected to the full set of associated substantive requirements.

Although the Commission previously defined these two terms, it did not adopt rules indicating how the definitions would be applied to cross-border security-based swap activities. Given the global nature of the security-based swap market, today’s rulemaking is critically important to providing market participants with certainty regarding how they will be regulated under Title VII, and thus is a major step forward in our implementation of the over-the-counter (OTC) derivatives regime mandated by the Dodd-Frank Act.

This rulemaking is the result of extraordinary effort by the Commission’s staff, and I want to thank the rulemaking team for their dedication. They were tasked with creating a coherent set of rules based on a nearly unworkable statute. Through their countless hours of hard work, they have presented us with a recommendation that is both consistent with the statute and can be applied in practice by market participants. Getting to this result required a substantial amount of effort in both time and thought, and I know that it involved many late nights, early mornings, and weekends. In addition, staff spent a number of hours sitting in a conference room with me, walking step-by-step through each aspect of the release. That time was extremely valuable in helping me get comfortable with the approach set forth in today’s recommendation, and I appreciate the staff’s willingness to address my many questions and concerns.

The rules we are adopting today will ensure that our security-based swap dealer and major security-based swap participant regulatory regimes are applied to cross-border security-based swap activities in a clear, consistent, and reasonable way. That outcome sounds easy enough to achieve, and should, in fact, be the result of each rulemaking the Commission undertakes. However, this is a tremendous achievement in the context of the highly complex OTC derivatives market, where global activities developed for decades with little regulation or regard for jurisdictional lines.

At the same time, I recognize that providing clarity regarding the scope of our rules does not necessarily mean that everyone will agree with the lines we have drawn. I would not be surprised if some market participants and foreign regulators question how far we reach across territorial boundaries in certain cases. However, the rules we are voting on today successfully balance the many competing factors that are unavoidable when developing a national regulatory structure for a global market. In particular, these rules fulfill our statutory mandate to regulate the U.S. security-based swap market, while at the same time addressing the sometimes conflicting needs to both protect against evasion of our laws and acknowledge that we cannot — and should not — attempt to regulate the entire globe.

Of course, the workability of this approach to the regulation of cross-border security-based swap activities in large part depends on how we apply substituted compliance to market participants that are subject to both our rules and those in the jurisdiction in which they are based. Where market participants are complying with requirements in their home country that achieve similar regulatory outcomes as our Title VII regime, we should deem compliance with such home country regulation sufficient to satisfy our own requirements. Likewise, we should expect other jurisdictions to defer to our regulations for U.S. market participants. I have tremendous respect for our international regulatory counterparts, and I look forward to collaborating with them as we seek to develop a workable global substituted compliance system.

One key component of the cross-border security-based swap regulatory regime that is not addressed in these final rules is the definition of “conduct within the United States.” The comments we received regarding the proposed definition of “conduct within the United States” revealed a number of competing factors that we must carefully consider before finalizing our approach. The complexity of the issue and the intensity of the comments led staff to recommend that we continue studying the matter and reserve final judgment on the definition of “conduct within the United States” until a later date. I concur with this approach. Moving forward on the key definitional terms in today’s release, while reserving the conduct issue for further study, shows how determined we are to not just get these rules done, but to get them done right. Proceeding in this way will allow market participants to begin building their compliance systems without waiting for our determination regarding the regulation of conduct within the United States. While I support this bifurcated approach, I also believe it is imperative that we provide certainty on the conduct issue as soon as we are able and not risk losing momentum in this effort. I therefore respectfully request that Chair White keep this issue on the top of the Commission’s rulemaking agenda and I encourage staff to continue their dialogue with market participants so we get the conduct definition right.

The American people deserve a robust OTC derivatives regulatory regime that is workable, faithful to the statute, consistent with the Commission’s core mission, and does not impose unacceptable or unreasonable costs on the economy. In order to achieve these goals, we must follow a deliberative process that combines extensive engagement with the public, thorough legal scrutiny, and rigorous economic analysis. This process may take time, but I am convinced that it is necessary to achieve a robust set of rules that will enable us to effectively regulate this market for decades to come. Thus, we should not allow ourselves to be influenced by calls to move more quickly as part of a short-sighted rush to complete our statutory mandate, or by pressure from those who might accuse the Commission of dragging its feet on these rules. Rather, we should continue to take a thoughtful approach toward the implementation of this new regime, and staff should be commended for their progress to date and encouraged to keep up the quality work they have been producing.

This is not the first time I have spoken publicly about the need for us to take the time necessary to get our security-based swap regime right. In a previous speech on cross-border derivatives issues, I referenced Aesop’s fable of the tortoise and the hare, with its overarching message of “Slow and steady wins the race.”[1] Our action today is a prime example of the truth in that story, and a validation of the Commission’s deliberative approach to implementing the OTC derivatives provisions of the Dodd-Frank Act.

Once again, I am pleased to support the rules before us, and I look forward to working with staff and my fellow Commissioners on the substantive OTC derivatives rules to come as we continue our steady path to implementing Title VII of the Dodd-Frank Act.

Thank you. I have no questions.

[1] See Remarks at AIMA Global Policy & Regulatory Forum by Commissioner Michael S. Piwowar (Mar. 6, 2014), available at

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