SEC Plan Gives Exemptions to Swap Dealers’ Overseas Branches

U.S. regulators face pressure to limit the international reach of swaps rules.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and other U.S. swap dealers would gain limits on the Dodd-Frank Act’s reach for overseas trades under a Securities and Exchange Commission proposal released today.

SEC commissioners voted 5-0 to seek comment on measures that would exempt overseas affiliates, including those guaranteed by U.S. banks, from registration when they conduct business predominantly with foreign clients. Overseas branches of U.S. banks could be exempt from Dodd-Frank standards for conduct with clients for equity and some credit swaps.

“This approach would allow the elimination of overlapping regulation when it truly is duplicative, while recognizing that regulatory regimes will necessarily differ in some respects,” SEC chairman Mary Jo White said at a meeting in Washington.

The SEC said it hoped the proposal would influence how global regulators address rule differences while working to reduce risk and increase transparency in the swaps market. The Commodity Futures Trading Commission is the predominant U.S. regulator for the $639 trillion global swaps market. The SEC, whose staff said the agency oversees 5 percent of the overall market, is writing rules for equity and some credit-default swaps.

“Its influence will clearly not be based on the relative size of the 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 before the meeting. “Any significant impact that this guidance will have will depend entirely on the extent to which it is regarded by the broader U.S and foreign regulatory community as having sensible and well-grounded policy and intellectual underpinnings.”

Dodd-Frank, the regulatory expansion enacted in response to the 2008 credit crisis, calls on the SEC and CFTC to have most swaps guaranteed at clearinghouses, traded on exchanges or other platforms and reported to regulators. The U.S. agencies have come under pressure to limit their international reach from JPMorgan and Goldman Sachs, both based in New York, as well as European, Asian and South American regulators.

Swaps rules under consideration by the SEC and CFTC are fragmenting the global market, nine overseas finance officials said in an April 18 letter urging Treasury Secretary Jacob J. Lew to limit Dodd-Frank’s reach.

“An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable,” the officials wrote to Lew, who has no formal role in SEC and CFTC rulemaking.


Prescribed Changes

The cross-border rules is the SEC’s first major proposal under White, who took over as chairman on April 10. White told lawmakers during her Senate nomination hearing in March that she would prioritize rules required by Dodd-Frank, which prescribed changes to reduce the risk of repeating the 2008 crisis fueled by unregulated swaps that forced the U.S. to bail out American International Group Inc.

The proposal approved today would govern how other SEC swap rules, many of which haven’t been completed, apply in cross-border transactions. The vote releases the proposal for a public-comment period to solicit views on its ideas.

The SEC outlined plans for allowing so-called substituted compliance, recognizing comparable overseas laws and enforcing its own rules when foreign standards aren’t sufficient. The proposal seeks to avoid a “line-by-line” comparison of U.S. and foreign laws and take a more flexible approach based on the outcomes of the rules, White said.

Patrick Pearson, head of the European Commission’s financial markets infrastructure unit, said during testimony at a House hearing in December that regulators should aim for one set of rules in cross-border transactions. The CFTC’s version of substitute compliance was “too modest” and should be “applied more broadly,” Pearson said.

The SEC’s proposal raises the potential for risk flowing back to the U.S. because of its treatment of overseas affiliates and branches, said Commissioner Luis Aguilar, part of the Democratic majority on the five-member panel.

“Under the proposed rules, two non-guaranteed foreign subsidiaries of two separate U.S. entities could engage in unlimited amounts of security-based swap transactions with each other outside the United States,” Aguilar said at the meeting. “The proposed rules seem to assume that any failure by these foreign subsidiaries would not financially affect the U.S. parents.”


July Deadline

Barclays Plc, UBS AG, Credit Suisse Group AG and other overseas-based dealers began registering with U.S. regulators at the end of last year. CFTC Chairman Gary Gensler said his agency shouldn’t extend a July 12 deadline for other rules to take effect.

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

The CFTC is willing to work with overseas officials to determine when foreign rules are similar enough that U.S. regulators let them satisfy Dodd-Frank’s goals, he said.

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


Bloomberg News

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