On April 29, 2015, the US Securities and Exchange Commission
(SEC) proposed new rules to enhance its oversight of non-US
firms' security-based swap activity in the United States. The
proposal, if adopted, will have important implications for any
global derivatives business.
Under the proposed rules, security-based swap transactions between
two non-US person counterparties that involve market-facing dealer
activity conducted by personnel located in the United States would
be subject to certain requirements under Title VII of the
Dodd-Frank Act. The new proposal is less expansive than the
original proposal in that it appears to construe the
"arranging, negotiating, or executing" of a non-US
transaction more narrowly than originally proposed. It also would
not subject these transactions to clearing and exchange-trading
mandates. At the same time, however, these transactions would be
included in the de minimis threshold, subject to reporting
and dissemination requirements, and, if the non-US firm is a
registered security-based swap dealer, subject to the external
business conduct standards in Title VII.
Dodd-Frank tasked the SEC with regulatory authority over
security-based swaps and the Commodity Futures Trading Commission
(CFTC) with authority over all other swaps. Both the SEC and the
CFTC have considered when Title VII should apply to cross-border
transactions. In June 2014, the SEC adopted final rules related to
the cross-border application of the security-based swap provisions
under Title VII. Those final rules focus on the definition of
"US person" and the definitions of "security-based
swap dealer" and "major security-based swap
participant" in the cross-border context. However, in adopting
those rules the SEC deferred consideration of whether Title VII
applies to a security-based swap transaction between two non-US
person counterparties where the security-based swap is arranged,
negotiated or executed by personnel of one or both counterparties
located in the United States.
The newly proposed SEC rules now seek to address this question.
Under the new proposal, the application of Title VII centers on the
market-facing dealing activity of personnel of a non-US person or
its agent that are located in the United States. If a non-US person
uses personnel located in a US branch or office to arrange,
negotiate or execute a security-based swap transaction, certain
Title VII requirements would apply to the transaction, even where
the other counterparty is also a non-US person. These transactions
would be subject to both trade reporting and public dissemination
requirements. In addition, they would be included in the de
minimis threshold calculations to determine whether non-US
persons are subject to the SEC's security-based swap dealer
registration requirements and oversight. However, these
transactions would not be subject to mandatory clearing or trade
execution. Additionally, if the non-US firm is a registered
security-based swap dealer, the external business conduct standards
in Title VII would apply to such dealing activity by personnel in
the United States. The SEC expressed the view that this approach
would strike an appropriate balance between enhanced regulatory
oversight, market transparency and investor protection for dealer
activity within the United States and recognition that the risks in
a transaction between non-US counterparties reside offshore.
The SEC noted that its proposed rule followed extensive discussion
with the CFTC and emphasized the need for consistency and the goal
of coordinated rules where appropriate. However, the SEC also
warned that the markets regulated by the SEC and CFTC often display
different characteristics that may warrant different approaches in
the agencies' respective rules. The SEC stressed that it would
continue to coordinate with the CFTC, which has published
interpretive guidance and a policy statement, rather than a formal
rulemaking, regarding the cross-border reach of the swaps
provisions of Title VII. Subsequent to the CFTC guidance, CFTC
staff issued an advisory taking the position that swaps between a
non-US swap dealer and other non-US person would be subject to all
transaction-based regulatory requirements if personnel located in
the United States regularly arranged, negotiated or executed the
swaps on behalf of the non-US swap dealer. In January 2014, the
CFTC requested comments regarding whether it should formally adopt
the staff advisory. Later that year, the CFTC extended no-action
relief to non-US swap dealers from certain transaction-level
requirements through September 2015.
In light of the soon-to-expire no-action relief, the CFTC may take
this opportunity to address the issue in a manner that harmonizes
its approach with the SEC action taken on Wednesday.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
