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By Sarah N. Lynch
WASHINGTON, June 25 U.S. securities regulators
adopted part of a long-awaited rule on Wednesday that spells out
when foreign banking operations that deal in derivatives will be
required to comply with new U.S. rules.
The Securities and Exchange Commission's rule marks an
important step toward implementing a series of regulations for
over-the-counter derivatives required by the 2010 Dodd-Frank
Wall Street reform law.
A centerpiece of the rule explains when certain cross-border
trades by foreign banks trigger a requirement for them to
register as a "security-based swap dealer".
Any bank deemed a dealer must register with U.S. regulators
and comply with potentially costly rules such as mandatory
clearing to reduce default risk and routing swaps onto regulated
platforms to promote price transparency.
"We appreciate the SEC moving forward ... it is essential
that we have clarity on jurisdictional lines," the Securities
and Investment Industry and Financial Markets Association, a
bank lobby group, said in a statement.
The support from SIFMA is important because the group is
embroiled in a legal fight with the Commodity Futures Trading
Commission over its version of the cross-border rules in the
derivatives markets it regulates.
The SEC rule also defines the scope of the SEC's anti-fraud
powers and spells out the process banks and others must follow
if they wish to comply with the rules of a foreign regulator,
rather than U.S. regulators.
The 2010 Dodd-Frank Wall Street reform law requires the SEC
and CFTC to jointly police the $710 trillion over-the-counter
derivatives market, with the SEC in charge of swaps tied to
securities such as credit derivatives or equity swaps.
Swaps are used to protect against market risks, such as
currency fluctuations or loan defaults.
The cross-border measure aims to apply regulations uniformly
and prevent problems that could spill into U.S. markets from
foreign bank units, as they did in the financial crisis from the
near-collapse of AIG.
But regulators have struggled to figure out how the new
rules should apply to swaps that cross the U.S. border without
stepping on foreign regulators' toes.
The issue also impacts foreign units of banks like Goldman
Sachs or Morgan Stanley, who may lose foreign
clients if they need to comply with the rule.
SEC commissioners said the final rule improved upon the
original proposal, and included changes to close loopholes.
For instance, it tightened language to make sure overseas
affiliates of banks that receive a "guarantee" from a U.S.
parent for a bailout will be captured by the rule.
Commissioners acknowledged not every loophole is closed, and
some lamented that the reach of the SEC's rules is not far
enough to address a trend of banks shifting their business to
units not explicitly guaranteed to evade U.S. rules.
"The rule does not do enough to heed the lessons learned
either during the crisis or afterwards. We know that foreign
trading affiliates are inextricably linked to their U.S.
parents," said SEC Democratic Commissioner Kara Stein.
Creating a workable cross border-rule has been a sore spot
for foreign regulators and Wall Street.
Most of the tension has been directed at the CFTC, which
oversees 95 percent of the swaps market and initially took a
more aggressive stance than the SEC in efforts to capture
foreign trades in its new regulations.
In 2013 the CFTC issued an interpretation of Dodd-Frank in
the form of interpretative guidance, while the SEC issued a more
formal rulemaking. Three Wall Street trade groups have legally
challenged the CFTC, in part arguing the agency bypassed
required rulemaking procedures such as conducting a rigorous
analysis of how the rules will impact the industry.
Wednesday's SEC measure does not address all outstanding
questions about cross-border issues. Officials said they will
complete other rules including mandatory clearing,
record-keeping and reporting, and rules addressing warehouses
that store swap-trading data.
(Reporting by Sarah N. Lynch, Additional reporting by Douwe
Miedema; Editing by Karey Van Hall and Meredith Mazzilli)