United States: SEC Reconsiders Cross-Border Swap Rules

Last Updated: May 28 2019
Article by Nihal S. Patel

The SEC proposed amendments and interpretive guidance to rules governing security-based swap activity in a cross-border context.

If adopted, the proposals would, among other things:

  • provide guidance as to when security-based swap transactions are considered to have been "arranged" or "negotiated" by U.S. personnel;

  • provide two alternative amendments to SEA Rule 3a71-3 ("Cross-border security-based swap dealing activity") to add an exception from "arranged, negotiated, or executed" requirements where the U.S. personnel are employees of (i) a registered security-based swap dealer ("SBSD") or (ii) a registered SBSD or a registered broker-dealer;

  • amend the certification and opinion of counsel requirements in SEA Rule 15Fb2-4 ("Nonresident security-based swap dealers and major security-based swap participants") and extend the filing time for security-based swap dealers or major security-based swap participants to submit certification and opinion of counsel;

  • exclude certain non-U.S. employees only involved in soliciting business from non-U.S. persons from the application of statutory disqualification provisions; and

  • modify recordkeeping requirements for SBSDs relating to questionnaires or applications for employment under proposed SEA Rule 18a-5.

Commentary / Nihal Patel

The proposal is significant for any non-U.S. entity that is contemplating registration as an SBSD. While the proposal is somewhat wide-ranging (over 300 pages), it largely focuses on three key points: (1) clarifying requirements relating to the "arranged, negotiated or executed" standard; (2) clarifying and providing relief for non-U.S. registrants from the currently problematic "opinion of counsel" requirements; and (3) providing background check relief for persons whose sales activities are outside of the United States.

All three are important for potential registrants, but (1) is the most interesting policy debate (while the other two are more about fixing existing problems), and it is notable that the SEC is taking steps to amend these rules even before the rules have ever been tested in practice, and before the CFTC has taken action on similar rules that it first formally proposed in 2016.

It will be interesting to see how significant commenters find the SEC-proposed relief to be. Under the SEC proposals, in order to rely on the relief, personnel at a U.S. entity that are acting in an "ANE" capacity for a non-U.S. entity would be subject to SBSD requirements and the non-U.S. entity would need to be subject to home-country margin and capital requirements. Thus, for example, a bank in France using personnel at its U.S. broker-dealer affiliate to "agent" a transaction with persons in Ecuador would be able to avoid U.S. SBSD registration only if the U.S. personnel comply with SBSD rules as though the French bank were registered as an SBSD, and the French bank would need to ensure that it is subject to appropriate regulation in France. As to the alternative proposal to permit the use of registered brokers (non-SBSDs) for this activity, it would be helpful if the SEC and FINRA were more clear about what aspects of broker-dealer regulation would apply to this type of activity (in addition to any SBSD requirements that apply as a condition of the exception) in order for market participants to provide more meaningful comments as to whether the exception is useful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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