U.S. SEC to adopt portion of cross-border derivatives rules

WASHINGTON, June 25 Wed Jun 25, 2014 10:00am EDT

WASHINGTON, June 25 (Reuters) - U.S. securities regulators were poised on Wednesday to adopt part of a long-awaited rule that spells out which foreign banks that deal in derivatives will be required to comply with new U.S. rules.

The Securities and Exchange Commission's rule marks the first important step toward implementing a series of regulations for over-the-counter derivatives required by the 2010 Dodd-Frank Wall Street reform law.

The measure does not address all of the outstanding questions about when swap trades that cross the U.S. border will be captured by U.S. rules or the rules of a foreign regulator.

Rather, Wednesday's final rule only implements a few components from the SEC's original May 2013 draft proposal.

Most notably, it will help banks such as Goldman Sachs or Morgan Stanley determine whether certain trades will count toward meeting the definition of being a "security-based swap dealer."

That definition is crucial, because any firm dubbed a swap dealer must comply with numerous U.S. regulations, including registration, central clearing of certain swaps and rules that route trades onto regulated platforms.

In addition, the rule defines the scope of the SEC's anti-fraud powers and spells out the process that banks and others must follow if they wish to comply with the rules of a foreign regulator, rather than U.S. regulators.

"The rules we are adopting today will ensure that our security-based swap dealer and major security-based swap participant regulatory regimes are applied to cross-border security-based swap activities in a clear, consistent, and reasonable way," said Republican SEC Commissioner Michael Piwowar in a prepared statement.

The SEC's rule only applies to a small sliver of the over-the-counter market it regulates, which includes equity swaps and certain credit derivatives.

Completing rules to address how cross-border swap trades should be treated by U.S. regulators has been a sore spot for Wall Street and foreign regulators for the past few years.

Most of the tension has been directed at the SEC's sister regulator, the Commodity Futures Trading Commission, which oversees the bulk of the $710 trillion over-the-counter derivatives market.

The CFTC had previously taken a more aggressive stance than the SEC in efforts to capture foreign trades in its new regulations.

In 2013 the CFTC issued cross-border guidance, instead of a more formal rule-making like the SEC's, in a maneuver that allowed the agency to avoid conducting an economic analysis of how its rules could impact the industry.

Late last year, three Wall Street trade groups filed a lawsuit seeking to rescind the CFTC's guidance, saying it is illegally circumventing federal laws that require more rigorous rulemaking.

That lawsuit is still pending. (Reporting by Sarah N. Lynch; Editing by Meredith Mazzilli)