U.S. SEC Proposes Rules For Cross-Border Swap Trades. By Sarah N. Lynch
Daily News (White Plains, NY)
May 02, 2013
The top U.S. securities regulator unveiled a proposal on Wednesday [May 1] that spells out how its rules for swaps will apply to foreign banks, saying it hoped its proposal can resolve a brewing global conflict over how to regulate the $640 trillion market.
"This is particularly important because the global nature of this market means that participants may be subject to requirements in multiple countries," SEC Chair Mary Jo White said.
The SEC and another regulator, the Commodity Futures Trading Commission, won broad new powers in the 2010 Dodd-Frank Wall Street reform law to police the $640 trillion derivatives market, which was then largely unregulated. But Europeans and the CFTC have butted heads over the issue of how the U.S. rules should apply abroad for the past year, with CFTC Chairman Gary Gensler blamed for his aggressive stance in how he wants to apply the rules abroad.
European regulators have countered that the CFTC's approach, which was first proposed last summer, could create duplicative regimes, and have urged the United States to let them regulate the banks on their own turf.
"This type of overlapping regulatory oversight could lead to conflicting or costly duplicative regulatory requirements. Market participants need to know which rules to follow - and I believe that this proposal will serve as the road map," said Ms. White, who was just sworn in as SEC chair last month.
The CFTC late last year granted broad exemptions that vastly scaled back the cross-border reach of its proposal, but these expire in the middle of July, and it has given no clues as to whether its final draft will be equally loose. The SEC's proposal on Wednesday reflects a less aggressive approach than what the CFTC had initially proposed, and are more aligned with the CFTC's less stringent, time- limited exemptions that are currently in place.
"The proposed rules approved today by the SEC provide yet another example of the significant difference in approach taken by each of the SEC and the CFTC," said Michael O'Brien, a partner at Winston & Strawn.
Others said that the two sets of rules ultimately might not come out all that differently, and that the SEC's more accommodating stance towards foreign regulators by no means meant it would be easier on the industry.
"The detail of the rules implies that it is by no means going to be a free pass," said Gareth Old, a lawyer at Clifford Chance in New York. "The (SEC) is going to scrutinize both non-U.S. regulations and also conduct by market participants in terms of how they use those regulations probably just as carefully as the CFTC."
Still, a few SEC commissioners on Wednesday flagged a variety of reservations with the plan. Commissioner Luis Aguilar, a Democrat, said he had concerns that the SEC's plan exempts foreign subsidiaries of U.S. firms from being dubbed "U.S. persons" - a category that subjects firms to certain SEC regulations.
"The proposed rules seem to assume that any failure by these foreign subsidiaries would not financially affect the U.S. parents," he said. "However, even without a legal obligation, a U.S parent company will likely step in to save its financially troubled subsidiaries ... The proposed rules do not appear to address fully these contagion and spillover risks."
Commissioner Troy Paredes, a Republican, raised completely opposite concerns, saying he has fears that trades cutting across international boundaries could still too often be captured by the SEC's rules.