* 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."
The Dodd-Frank law requires swap dealers and major traders
to set aside capital and post margin on some of the more complex
Most swaps must be routed through clearinghouses to protect
against default and be traded on regulated platforms to improve
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.