WASHINGTON (Reuters) - 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