On June 25, 2014, the United States Securities and Exchange Commission (“SEC”) adopted the first in a series of final rules and interpretive guidance related to U.S. regulation of cross-border security-based swap activities. This guidance follows the cross-border guidance issued in July 2013 by the United States Commodity Futures Trading Commission (“CFTC”) with respect to cross-border swap transactions.
The SEC rule and guidance address the circumstances under which non-U.S. persons may be required to register as a security-based swap dealer or a major security-based swap participant; establishes a process by which regulators and market participants outside the United States may apply for substituted compliance; and addresses the scope of the SEC’s antifraud enforcement authority with respect to security-based swaps transactions that occur, in part or in whole, outside of the United States. Substituted compliance would permit parties that are in compliance with another jurisdiction’s comparable regulatory framework to which a transaction is also subject to be considered in compliance with SEC regulations.
The SEC rule applies a territorial approach to the regulation of security-based swaps activity, under which transactions by a non-U.S. person with certain counterparties are considered to have taken place in the United States regardless of where the activity actually occurred. This approach is fundamentally different than the CFTC’s approach to extraterritorial application of swap dealer and major swap participant registration requirements, with the difference apparently driven by the fact that the Dodd-Frank Act provides the SEC with narrower extraterritorial jurisdiction over security-based swaps markets than it grants the CFTC with respect to swaps markets. The territorial approach reflected in the rule may have implications for the reach of the SEC’s enforcement jurisdiction outside the United States, not only with respect to security-based swaps, but also with respect to other aspects of securities regulation.
Under the final rule, a non-U.S. person (other than a conduit affiliate) that is engaged in security-based swap dealing or other swaps-related activity may be subject to registration with the SEC as a security-based swap dealer or major security-based swap participant in whole or in part as a result of transactions (i) with U.S. persons and (ii) with non-U.S. persons that are subject to recourse guarantees byU.S. affiliates. The final rule permits non-U.S. persons (other than conduit affiliates) to exclude from the applicable de minimis calculation certain positions that arise from transactions conducted entirely outside the United States through a foreign branch of a U.S. bank that is registered as a security-based swap dealer or that occur at least to 60 days prior to the effective date of final rules providing for the registration of security-based swap dealers. A non-U.S. person that is a conduit affiliate of a U.S. person must count all of its transactions against the applicable de minimis exception. A “conduit affiliate” is a non-U.S. affiliate of a U.S. person that enters into security-based swaps with non-U.S. persons or with certain foreign branches of a U.S. bank on behalf of its U.S. affiliates (other than U.S. affiliates that are registered as security-based swap dealers or major security-based swap participants) and enters into offsetting transactions with its U.S. affiliates to transfer the risks and benefits of those security-based swaps.
The final rule will become effective 60 days after publication in the Federal Register, which will likely occur in the first half of July 2014.
