* SEC cross-border plan seen as less aggressive than CFTC's * Foreign regulators have raised fears of U.S. overeach * SEC says its plan represents a middle ground By Sarah N. Lynch WASHINGTON, May 1 The top U.S. securities regulator unveiled a proposal on Wednesday that spells out how its rules for swaps will apply to foreign banks, saying it hoped its proposal can resolve a brewing global conflict over how to regulate the $640 trillion market. The Securities and Exchange Commission's rules would apply to U.S. financial firms trading with foreign counterparties in equity swaps or credit-default swaps, financial tools that can be used to hedge against market losses. The SEC's 1,000-page draft could help soothe tensions between European regulators and the U.S. Commodity Futures Trading Commission over disagreements about how far-reaching U.S. derivatives rules should be. "This is particularly important because the global nature of this market means that participants may be subject to requirements in multiple countries," SEC Chair Mary Jo White said on Wednesday. The SEC and another regulator, the Commodity Futures Trading Commission (CFTC), won broad new powers in the 2010 Dodd-Frank Wall Street reform law to police the $640 trillion derivatives market, which was then largely unregulated. But Europeans and the CFTC have butted heads over the issue of how the U.S. rules should apply abroad for the past year, with CFTC Chairman Gary Gensler blamed for his aggressive stance in how he wants to apply the rules abroad. European regulators have countered that the CFTC's approach, which was first proposed last summer, could create duplicative regimes, and have urged the United States to let them regulate the banks on their own turf. "This type of overlapping regulatory oversight could lead to conflicting or costly duplicative regulatory requirements. Market participants need to know which rules to follow - and I believe that this proposal will serve as the road map," said the SEC's White, who was just sworn in as SEC chair last month. NO FREE PASS The SEC's proposal would generally subject U.S.-based businesses to the commission's derivatives rules, but would defer to foreign regulators to police banks in their own countries whenever possible. The CFTC late last year granted broad exemptions that vastly scaled back the cross-border reach of its proposal, but these expire in the middle of July, and it has given no clues as to whether its final draft will be equally loose. The SEC's proposal on Wednesday reflects a less aggressive approach than what the CFTC had initially proposed, and are more aligned with the CFTC's less stringent, time-limited exemptions that are currently in place. "The proposed rules approved today by the SEC provide yet another example of the significant difference in approach taken by each of the SEC and the CFTC," said Michael O'Brien, a partner at Winston & Strawn. Others said that the two sets of rules ultimately might not come out all that differently, and that the SEC's more accommodating stance towards foreign regulators by no means meant it would be easier on the industry. "The detail of the rules implies that it is by no means going to be a free pass," said Gareth Old, a lawyer at Clifford Chance in New York. "The (SEC) is going to scrutinize both non-U.S. regulations and also conduct by market participants in terms of how they use those regulations probably just as carefully as the CFTC." MORE CAUTIOUS The Dodd-Frank law requires swap dealers and major traders to set aside capital and post margin on some of the more complex derivatives trades. Most swaps must be routed through clearinghouses to protect against default and be traded on regulated platforms to improve price transparency. The law also calls for the SEC and the CFTC to oversee trading in other countries in cases where it may have a "direct and significant" effect on U.S. business, though there has been debate on how to interpret that phrase. The CFTC oversees the lion's share of the market, including all interest-rate swaps, but although the SEC only regulates a tiny sliver of the over-the-counter market, its proposal could still carry much weight in the debate. That's because the SEC has taken more time in crafting its rules and deferred all compliance dates, saying it wants to figure out first how all of the regulations will fit together before it starts implementing them. Still, a few SEC commissioners on Wednesday flagged a variety of reservations with the plan. SEC Commissioner Luis Aguilar, a Democrat, said he had concerns that the SEC's plan exempts foreign subsidiaries of U.S. firms from being dubbed "U.S. persons" - a category that subjects firms to certain SEC regulations. "The proposed rules seem to assume that any failure by these foreign subsidiaries would not financially affect the U.S. parents," he said. "However, even without a legal obligation, a U.S parent company will likely step in to save its financially troubled subsidiaries ... The proposed rules do not appear to address fully these contagion and spillover risks." SEC Commissioner Troy Paredes, a Republican, raised completely opposite concerns, saying he has fears that trades cutting across international boundaries could still too often be captured by the SEC's rules.