SEC Weighs Cross-Border Swap Rules

The Securities and Exchange Commission plans to propose measures determining when U.S. rules apply to cross-border swap trades amid calls from foreign counterparts to limit the reach of Dodd-Frank Act oversight.

SEC commissioners meeting in Washington today probably will approve a 1,000-page proposal that could influence how global regulators address rule differences while working to reduce risk and increase transparency in the swaps market. The SEC is writing rules for equity and some credit-default swaps, while the Commodity Futures Trading Commission is the predominant U.S. regulator for the $639 trillion global market.

“Its influence will clearly not be based on the relative size of the security-based swap market that is supervised by the SEC,” Edward J. Rosen, New York-based partner at Cleary Gottlieb Steen & Hamilton LLP, said of the SEC rules in an e- mail. “Any significant impact that this guidance will have will depend entirely on the extent to which it is regarded by the broader U.S and foreign regulatory community as having sensible and well-grounded policy and intellectual underpinnings.”

Dodd-Frank, the regulatory expansion enacted in response to the 2008 credit crisis, calls on the SEC and CFTC to have most swaps guaranteed at clearinghouses, traded on exchanges or other platforms and reported to regulators. The U.S. agencies have come under pressure to limit their international reach from JPMorgan Chase & Co., Goldman Sachs Group Inc. as well as European, Asian and South American regulators.

Swaps rules under consideration by the SEC and CFTC are fragmenting the global market, nine overseas finance officials said in an April 18 letter urging Treasury Secretary Jacob J. Lew to limit Dodd-Frank's reach.

“An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms' derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable,” the officials wrote to Lew, who has no formal role in SEC and CFTC rulemaking.

The cross-border rules will be the SEC's first major proposal under Chairman Mary Jo White, who took over the agency on April 10. White told lawmakers during her Senate nomination hearing in March that she would prioritize rules required by Dodd-Frank, which prescribed changes to reduce the risk of repeating the 2008 crisis fueled by unregulated swaps that forced the U.S. to bail out American International Group Inc.

Substituted Compliance

The proposal being considered today would govern how other SEC swap rules, many of which haven't been completed, apply in cross-border transactions. Commissioners also will vote on whether to redraft a rule, initially proposed in November 2010, that would require public reporting of swaps data to central record-keeping facilities. The SEC's vote would be followed by a public-comment period to solicit views on its ideas.

“The staff is hopeful that the proposal will advance the dialogue with fellow regulators across the globe and move us all toward a pragmatic middle ground solution to cross border issues,” John Nester, an SEC spokesman, said in an e-mail statement.

The SEC should allow so-called substituted compliance, recognizing comparable overseas laws and enforcing its own rules when foreign standards aren't sufficient, Commissioner Elisse B. Walter said in a speech last month in Washington.

Patrick Pearson, internal market and services directorate generate for the European Commission, said during testimony at a House hearing in December that regulators should aim for one set of rules in cross-border transactions. The CFTC's version of substitute compliance was “too modest” and should be “applied more broadly,” Pearson said.

Commissioner Daniel Gallagher also has called for more flexibility, urging in a March 21 speech that the SEC take a broader view of equivalent regulations.

“It will be critical to incorporate some sort of regulatory deference into any cross-border approach to regulating security-based swaps,” Gallagher said.

Barclays Plc, UBS AG, Credit Suisse Group AG and other overseas-based dealers began registering with U.S. regulators at the end of last year. CFTC Chairman Gary Gensler said his agency shouldn't extend a July 12 deadline for other rules to take effect.

“I think that we've got a good approach at the CFTC, but also we have a different law than the SEC,” Gensler said yesterday after Bloomberg's Washington Summit. “There may be differences.”

The CFTC is willing to work with overseas officials to determine when foreign rules are similar enough that U.S. regulators let them satisfy Dodd-Frank's goals, he said.

“It's been nine months that that guidance has been out there” he said. “It's time for us to finish the deliberative process.”

Bloomberg News

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