On April 29, the Securities and Exchange Commission (SEC) proposed some additional rules for security-based swaps (SBS) that reflect a firm belief (shared by the Commodity Futures Trading Commission) that derivatives activity that takes place in the United States must be subject to relevant US regulation even if the resulting transaction will be one involving only non-US persons.
The key points of the proposed rules are as follows:
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A non-U.S. person must include in its SBS dealer and major SBS participant calculations any SBS connected with its dealing activity that it arranges, negotiates or executes using its own personnel, or personnel of an agent, in each case located in the United States.
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An SBS involving a non-US person is subject to Regulation SBSR’s regulatory reporting and public dissemination requirements if it meets any of the following conditions:
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It is executed on a platform having its principal place of business in the United States;
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It is effected by or through a registered broker-dealer (including a registered security-based swap execution facility); or
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It is connected with a non-US person’s SBS dealing activity and is arranged, negotiated or executed by personnel of a non-US person located in a US branch or office, or by personnel of an agent of a non-US person located in a US branch or office.
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A non-US person that is registered with the SEC as an SBS dealer must comply with the external business conduct standards for any SBS arranged, negotiated or executed by US-based personnel or agents.
Although these three points collectively will add significant additional US regulation to some SBS transactions between non-US persons, the SEC takes the position in the preamble to the proposed rules that mandatory clearing and trade execution are not applicable to such transaction solely because one or both counterparties arrange, negotiate or execute the security-based swap using personnel located in the United States.
The concepts of “arranging” and “negotiating” an SBS are not specifically defined in the proposed regulations, but the SEC explains in the preamble that these terms are intended to encompass only market-facing activity of sales or trading personnel in connection with a particular transaction, including interactions with counterparties or their agents, as opposed to the activities of persons involved in swap operations or documentation. The SEC also explains that the term “execute” refers to the market-facing act that, in connection with a particular transaction, causes a party to become irrevocably bound to the terms of an SBS under applicable law.
The SEC states in the preamble that it has consulted and coordinated with the CFTC as well as with banking and foreign regulators in formulating its proposal. That statement suggests that the next iteration of CFTC cross-border guidance may take a similar approach to regulating swap activity of non-US persons that takes place in the United States.
The deadline for comments on the proposed regulations is 60 days after they are published in the Federal Register (which has yet to occur).
The proposed rules are available here.
