The US Securities and Exchange Commission (SEC) yesterday unveiled its new framework for cross-border swaps, with chairman Mary Jo White claiming that its 'substituted compliance' approach would reduce the regulatory complexity faced by global market participants.
At an open meeting in Washington, the SEC, which regulates US securities-based swaps market activity, voted unanimously to propose rules and interpretive guidance for parties to cross-border swaps.
The proposals outline the regulatory requirements for transactions taking place across US borders and specify when security-based swap dealers, major security-based swap participants and other entities must register with the SEC.
"We should take a robust and workable approach to this particularly complex and predominantly global market," said White. "The global nature of this market means that participants may be subject to requirements in multiple countries, and 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."
The substituted compliance approach taken by the SEC recognises comparable regulatory frameworks in other jurisdictions around the world and in principle accepts that firms' compliance with their local regulator means they do not have to explicitly comply with similar rules in every other market in which they operate.
"This approach would allow a foreign market participant to comply with requirements imposed by its own home country so long as those requirements are comparable to our regulations," said White. "Where the home country's regulations are not comparable, that market participant would be required to abide by our rules."
White said that substituted compliance would not be based on a "line-by-line" comparison of derivatives rules in non-US jurisdictions, but would focus instead on the regulatory outcomes of other countries' rules, including an assessment of compliance and supervision.
The cross-border securities swaps rules are part of SEC's implementation of Title VII of the Dodd-Frank Act, which revamps reporting, clearing and trading in the US OTC derivatives market in line Group of 20 requirements to reduce systemic risk. The Commodity Futures Trading Commission - which is responsible for implementing Dodd Frank for rates, credit, FX and swaps instruments - has been criticised by some market participants and non-US regulators for its approach to the extra-territorial impacts of Dodd-Frank.
Eight finance ministers and a European commissioner recently sent a letter to US Treasury Secretary Jack Lew which claimed that the application of US domestic regulatory rules to firms' derivatives transactions in broadly equivalent regulatory regimes abroad would "dampen liquidity, investment and growth".
The comment period for the SEC's proposed rules and interpretive guidance for cross-border security-based swap activities will occur for 90 days after they are published in the Federal Register. Separately, the Commission voted unanimously to reopen the public comment period for all rules not yet finalised, stemming from Title VII of the Dodd-Frank Act.