On April 29, 2015, the Securities and Exchange Commission (SEC or Commission) held an open meeting to consider whether to propose amendments and re-propose a rule under the Securities Exchange Act of 1934 (Exchange Act) governing the application of certain Title VII requirements to security-based (SB) swap transactions connected with a non-US person’s dealing activity that are arranged, negotiated, or executed by personnel located in a US branch or office or in a US branch or office of an agent (“Cross-Border Proposal”).
The Commission unanimously approved the Cross-Border Proposal. The comment period will be 60 days after publication in the Federal Register.
Stephen Luparello, Director, Division of Trading and Markets, presented the Cross-Border Proposal to the Commission, stated that Commission staff had engaged in “extensive discussion” with their CFTC counterparts and the Cross-Border Proposal contains the following preliminary conclusions: (1) an activity-based approach to the application of Title VII should rely on a common test; (2) an activity-based approach should focus on the market facing activity of dealers in the US; and (3) the proposal focuses on addressing specific concerns raised in a transaction between two non-US persons. He explained that transactions described in the Cross-Border Proposal would count toward dealer registration and trigger other Title VII requirements, including customer protection and public dissemination requirements. He added that such transactions would not be subject to mandatory clearing or mandatory trading requirements.
Mark Flannery, Division of Economic and Risk Analysis, stated that the Cross- Border Proposal would potentially subject a greater number of transactions to reporting and public dissemination requirements under Regulation SBSR, and added that non-US persons may be more likely to exceed the de minimis SB swap dealer registration threshold. In terms of the potential consequences of the proposal on competition and efficiency in SB swap market, he stated that the Cross-Border Proposal would ensure more uniform regulatory treatment of entities that participate in the US SB swap market. Mr. Flannery stated that, while the Cross-Border Proposal could encourage non-US persons to relocate operations outside the US, the proposed approach is “tailored to appropriately limit burdens” on non-US persons.
Chair Mary Jo White explained that the Cross-Border Proposal would apply certain Title VII requirements to transactions that a non-US person – in connection with its dealing activity – arranges, negotiates or executes using personnel located in a US branch or office. She remarked that these proposed rules are “critical for the SEC’s regulation of the security-based swap market as they would help ensure that both U.S. and non-U.S. dealers are subject to [SEC’s] registration, reporting, public dissemination, and business conduct requirements when they engage in security-based swap activity in the United States, resulting in increased transparency and enhanced stability and oversight.” Providing background on the proposal, Chair White explained that the Commission had deferred consideration of this matter in its 2014 cross- border rulemaking.
She stated that, in developing this proposal, the Commission has been “keenly aware of the important steps that the [Commodity Futures Trading Commission (CFTC)] has already taken in this area and the compliance implications that differences in [the respective] final approaches may create for market participants.” She stated that staff has considered the comments in response to the SEC cross-border proposing release, as well as the views that the CFTC received regarding a November 2013 staff advisory on similar issues. Chair White remarked that there are differences in the swap versus SB swap markets that “could justify differences in [the respective] rules.”
Chair White explained that the Cross-Border Proposal “centers on activity that is carried out by a non-U.S. person or its agent in the United States in connection with its dealing activity, rather than focusing on the activity of any counterparty to a security-based swap transaction.” She added that, under the proposal, “a non-U.S. dealer would need to look only to where its own personnel or its agent’s personnel engage in certain market-facing activity with respect to a particular security-based swap transaction.” She explained that such transactions would count toward the SB swap dealer registration calculations and other various Title VII requirements would apply to the transaction, including trade reporting and public dissemination requirements.
Commissioner Luis Aguilar expressed support for the Cross-Border Proposal, stating that it would assure that all dealers conducting business in the US are appropriately registered with the Commission and are subject to external business conduct standards. He also stated that the proposal is designed to prevent restructuring “charades” to avoid Title VII requirements and would plug “loopholes,” thereby preventing dealers from accumulating hidden risk to the US financial system. He remarked that the proposal represents a “necessary step forward,” and urged the Commission to adopt the remaining Title VII rules.
Commissioner Daniel Gallagher supported the Cross-Border Proposal, stating that it reflects “thoughtfulness in analyzing the difficult issues presented.” He expressed a particular interest in reviewing public comments on how this proposal may impact US competitiveness in the global marketplace.
Commissioner Kara Stein supported the Cross-Border Proposal and summarized that it provides that, if an SB swap is arranged, negotiated or executed by personnel located in the United States, the transaction should be subject to both reporting and public dissemination requirements and count towards the SB swap dealer registration requirement. Commissioner Stein highlighted certain “conceptual challenges,” including those related to SB swap execution facilities (SEFs). She questioned whether there would be a loss of liquidity for US SB SEFs, “if the transactions governed by the [Cross-Border Proposal] are swept out of the U.S. SEF execution requirement.” Commissioner Stein stated that the Cross-Border Proposal takes a “tailored approach,” and although the Commission is not proposing to apply US clearing or trade execution requirements to transactions under the proposal, the Commission will “monitor future developments and take additional steps as necessary.”
Commissioner Michael Piwowar supported the Cross-Border Proposal and expressed an interest in receiving comments from “from all relevant market participants, as these rules will impact not just the non-U.S. dealers operating under this model, but also their counterparties and U.S. competitors.”