SEC Proposed Rule: Cross-Border Security-Based Swap Activities

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on Cross-Border Activities Regulation. For a summary of the final rule on the application of swap entity definitions to cross-border security-based swap activities (Feb 2016), click here.
Dodd-Frank Timeline, Cross-Border Application of Swap Entity Provisions, SEC
Final Rule Posted Effective Date Final Rule - Non-U.S. Persons
July 9, 2014 September 8, 2014 February 10, 2016

On May 1, 2013, the SEC approved a proposed rulemaking and a request for comment regarding cross-border application of security-based swaps rules related to the Dodd-Frank Act. The rule appeared in the Federal Register on May 23, 2013, and the deadline for public comment was August 21, 2013. Comments can be found HERE.


Among the provisions of Title VII of the Dodd-Frank Act is a requirement that swaps reforms shall not apply to activities outside the United States unless those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.” The SEC is tasked with developing a framework for oversight of security-based swaps, and to adapt the SEC regulations to include such oversight.

The concern is that swap trading by foreign affiliates of large financial entities pose a systemic risk to the U.S., and thus should be under commission jurisdiction. The proposed rule includes many questions for discussion with market participants regarding the structure of cross-border jurisdiction.

According to the CFTC/SEC Joint Final Rule on Swap Product Definitions, July 2012, the following products are considered "security-based swaps:"

  • Yields, where “yield” is a proxy for the price or value of a debt security, loan or narrow-based security index (except in the case of certain government debt obligations).
  • Total Return Swaps on a single security, loan, or narrow-based security index
  • Instruments on security futures
  • Credit Default Swaps based on single names, loans and narrow-based security indexes.

Summary of the Proposed Rule[edit]

The proposal and interpretive guidance would address the following:

  • an interpretation of the term “U.S. person;"
  • the criteria for determination of whether a non-U.S. person would be required to register with the Commission as a Security-based Swap Dealer or Major Security-based Swap Participant ("SB-SD/MSP");
  • the regulatory requirements that would apply to a SB-SD/MSP;
  • the criteria for determination of whether a transaction must be reported, disseminated, cleared, or executed on a swap execution facility (SEF); and
  • the conditions by which a data repository would turn over data without requiring an indemnification agreement from the requesting regulator.

Registration Thresholds[edit]

In general, the thresholds for swap dealers and major swap participants would follow the de minimis levels set by the joint rules on swap entity definitions, approved on April 18, 2012.

Conducting the De Minimis Calculation — In 2012, the SEC and the CFTC jointly adopted rules indicating that a security-based swap dealer would be required to register with the Commission if its notional amount of dealing transactions conducted in the past 12 months exceeded a de minimis level. For foreign dealers, the de minimis level would include the value of swap transactions conducted with U.S. persons, and all transactions conducted within the U.S. Non-U.S. persons would NOT be required to count dealings with foreign affiliates of U.S. banks toward the threshold, nor would non-U.S. dealer affiliates guaranteed by U.S. affiliates.

"Entity Level" Versus "Transaction Level" Activities[edit]

The proposal separates the requirements of a security-based swap dealer into two categories, those that apply to the firm as a whole ("Entity-level") and those that apply to each swap ("Transaction-level").

Entity-level requirements include capital, margin, and risk management requirements. Transaction level requirements include external business conduct standards. In general, segregation requirements would only apply with respect to transactions with counterparties who are U.S. persons. Also, U.S. banks that conduct security-based swap activity out of a foreign branch would not be required to comply with external business conduct requirements with respect to their foreign business.

Foreign major security-based swap participants would need to comply with the entity level requirements, but not the transaction level requirements in their transactions with counterparties that are non-U.S. persons.

As with many of the provisions, non-U.S. persons in jurisdictions with comparable regulations may substitute compliance with home regulations rather than conform to those of the commission "substituted compliance").

Attribution of Guaranteed Positions[edit]

A guarantee on a security-based swap allows a counterparty to demand that the person providing the guarantee perform the obligations of the guaranteed entity under the security-based swap. In 2012, the SEC and the CFTC jointly adopted interpretive guidance generally requiring persons to include in their calculations of the major security-based swap threshold any positions resulting from transactions that they guarantee. Under the proposed approach, guaranteed positions would be attributed as follows:

  • A non-U.S. person that guarantees performance of the security-based swap obligations of a U.S. person would attribute to itself all of the U.S. person’s security-based swap positions that it guarantees.
  • A non-U.S. person that guarantees performance on the security-based swap transactions of another non-U.S. person would attribute to itself only the guaranteed security-based swap positions arising from transactions with U.S. person counterparties.
  • A U.S. person that guarantees performance of the security-based swap obligations of a non-U.S. person would attribute to itself all of that non-U.S. person’s security-based swap positions that it guarantees, regardless of whether the non-U.S. person’s positions arise from transactions with a U.S. person counterparty or a non-U.S. person counterparty.
  • However, a guarantor would not be required to attribute to itself any guaranteed positions entered into by a non-U.S. person that is subject to Basel capital standards.

Swap Reporting, Clearing and Execution Requirements[edit]

Among the provisions of the Dodd-Frank Act are requirements for execution of swaps on either a designated contract market (DCM) or a swap execution facility (SEF), mandatory clearing, and reporting to a swap data repository (SDR).

Under the proposal, transactions would need to be reported if:

  • either counterparty is a U.S. person;
  • either counterparty is a non-U.S. person that receives a guarantee from a U.S. person;
  • either counterparty is a registered security-based swap dealer; or
  • the transactions is conducted within the U.S.

Public dissemination, clearing, and trade execution requirements would be required for security-based swap transactions when:

  • either counterparty is a U.S. person (including foreign branches of U.S. banks);
  • either counterparty is a non-U.S. person that receives a guarantee from a U.S. person on its performance;
  • the transaction is conducted within the U.S. and does not qualify from any clearing or execution exceptions;

Transmitting Data from a Swap Data Repository[edit]

Under Title VII, any government agency — foreign or domestic — that seeks information from a security-based swap data repository must first provide the data repository with an indemnification agreement. The agreement would ensure that, if sued, the data repository could be reimbursed by the requesting government agency for any expenses arising from litigation relating to the information.

Also, the proposal would enable the data repository to waive the indemnification requirement if:

  • The requesting authority seeks security-based swap information from the security-based swap data repository to fulfill its regulatory mandate or legal responsibility;
  • The authority’s request pertains to a person or financial product subject to its jurisdiction, supervision, or oversight; or
  • The requesting authority has entered into a supervisory and enforcement memorandum of understanding or other arrangement with the SEC that addresses the confidentiality of the security-based swap information provided and any other matters as determined by the Commission.

Related Document: Proposed Rule as Sent to the Federal Register[edit]


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