On June 25, 2014, the SEC approved rules and guidance on cross-border security-based swap activities. It was the first in a series of rules to be approved relating to how SEC regulations would apply to cross-border security-based swap transactions and participants in these markets.

The rules and guidance explain when a cross-border transaction must be counted toward the SEC requirement to register as a security-based swap dealer or major security-based swap participant. The rules also address the scope of the SEC's cross-border anti-fraud authority.

The SEC also adopted a rule regarding substituted compliance requests and established a procedure for market participants to satisfy certain obligations by complying with comparable foreign regulatory requirements.

The rules detail, among other things, the criteria for when foreign firms are covered by the SEC's regulatory regime. They specify when market participants engaged in cross-border swaps activity would be subject to SEC regulation as dealers or major participants and they define a number of key terms such as a U.S. person.

Mary Jo White, Chairwoman of the SEC, in a statement said the rules were strengthened from the SEC's 2013 proposal.  White said that, among other things, they include "robust additional limits on unregulated activity by U.S. firms acting through their branches and affiliates established abroad as well as enhancements to ensure that private funds do not circumvent the intended ambit of Title VII."  White highlighted two aspects of the final rules:

  • First, a guaranteed foreign affiliate of a U.S. person must now consider all of its security-based swap activity subject to a U.S. guarantee in assessing whether it is a dealer within the SEC's oversight. "Where there is a guarantee in place with respect to that activity, there are no distinctions for these purposes between activity directed toward the U.S. and activity directed abroad," White said.
  • Secondly, what constitutes a "guarantee" was clarified in the final rule. "In general, a U.S. person guarantees any security-based swap where there is a legally enforceable right of recourse against the U.S. person - conditional or unconditional, in whole or in part, oral or written, by contract or statute," White said.

The rules were published in the Federal Register on July 9, 2014 and will become effective on September 8, 2014.  However, the application of the dealer and major participant definitions and the procedures for submitting substituted compliance requests will not be imposed until other relevant rulemakings have been finalized, the SEC said.