The Securities and Exchange Commission plans to propose measuresdetermining when U.S. rules apply to cross-border swap trades amidcalls from foreign counterparts to limit the reach of Dodd-FrankAct oversight.

SEC commissioners meeting in Washington today probably willapprove a 1,000-page proposal that could influence how globalregulators address rule differences while working to reduce riskand increase transparency in the swaps market. The SEC is writingrules for equity and some credit-default swaps, while the CommodityFutures Trading Commission is the predominant U.S. regulator forthe $639 trillion global market.

“Its influence will clearly not be based on the relative size ofthe security-based swap market that is supervised by the SEC,”Edward J. Rosen, New York-based partner at Cleary Gottlieb Steen& Hamilton LLP, said of the SEC rules in an e- mail. “Anysignificant impact that this guidance will have will dependentirely on the extent to which it is regarded by the broader U.Sand foreign regulatory community as having sensible andwell-grounded policy and intellectual underpinnings.”

Dodd-Frank, the regulatory expansion enacted in response to the2008 credit crisis, calls on the SEC and CFTC to have most swapsguaranteed at clearinghouses, traded on exchanges or otherplatforms and reported to regulators. The U.S. agencies have comeunder pressure to limit their international reach from JPMorganChase & Co., Goldman Sachs Group Inc. as well as European,Asian and South American regulators.

Swaps rules under consideration by the SEC and CFTC arefragmenting the global market, nine overseas finance officials saidin an April 18 letter urging Treasury Secretary Jacob J. Lew tolimit Dodd-Frank's reach.

“An approach in which jurisdictions require that their owndomestic regulatory rules be applied to their firms' derivativestransactions taking place in broadly equivalent regulatory regimesabroad is not sustainable,” the officials wrote to Lew, who has noformal role in SEC and CFTC rulemaking.

The cross-border rules will be the SEC's first major proposalunder Chairman Mary Jo White, who took over the agency on April 10.White told lawmakers during her Senate nomination hearing in Marchthat she would prioritize rules required by Dodd-Frank, whichprescribed changes to reduce the risk of repeating the 2008 crisisfueled by unregulated swaps that forced the U.S. to bail outAmerican International Group Inc.

Substituted Compliance

The proposal being considered today would govern how other SECswap rules, many of which haven't been completed, apply incross-border transactions. Commissioners also will vote on whetherto redraft a rule, initially proposed in November 2010, that wouldrequire public reporting of swaps data to central record-keepingfacilities. The SEC's vote would be followed by a public-commentperiod to solicit views on its ideas.

“The staff is hopeful that the proposal will advance thedialogue with fellow regulators across the globe and move us alltoward a pragmatic middle ground solution to cross border issues,”John Nester, an SEC spokesman, said in an e-mail statement.

The SEC should allow so-called substituted compliance,recognizing comparable overseas laws and enforcing its own ruleswhen foreign standards aren't sufficient, Commissioner Elisse B.Walter said in a speech last month in Washington.

Patrick Pearson, internal market and services directorategenerate for the European Commission, said during testimony at aHouse hearing in December that regulators should aim for one set ofrules in cross-border transactions. The CFTC's version ofsubstitute compliance was “too modest” and should be “applied morebroadly,” Pearson said.

Commissioner Daniel Gallagher also has called for moreflexibility, urging in a March 21 speech that the SEC take abroader view of equivalent regulations.

“It will be critical to incorporate some sort of regulatorydeference into any cross-border approach to regulatingsecurity-based swaps,” Gallagher said.

Barclays Plc, UBS AG, Credit Suisse Group AG and otheroverseas-based dealers began registering with U.S. regulators atthe end of last year. CFTC Chairman Gary Gensler said his agencyshouldn't extend a July 12 deadline for other rules to takeeffect.

“I think that we've got a good approach at the CFTC, but also wehave a different law than the SEC,” Gensler said yesterday afterBloomberg's Washington Summit. “There may be differences.”

The CFTC is willing to work with overseas officials to determinewhen foreign rules are similar enough that U.S. regulators let themsatisfy Dodd-Frank's goals, he said.

“It's been nine months that that guidance has been out there” hesaid. “It's time for us to finish the deliberative process.”

Bloomberg News

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