U.S. SEC proposes rules aimed at supervision of cross-border derivatives

WASHINGTON, May 10 (Reuters) - The top U.S. markets regulator on Friday proposed rules aimed at improving how the financial market accepts and supervises cross-border derivative applications.

The Securities and Exchange Commission’s proposed rules are targeted at systemic risks foreign firms could pose to the U.S. financial system, while leaving supervision of trading practices and market structures like clearing houses to their home supervisor.

“These proposals preserve important investor and market protections, while at the same time addressing several of the practical implementation challenges that have been identified,” SEC Chairman Jay Clayton said in a statement.

Friday’s proposal, which is open to a 60-day public comment period, will likely be an interagency mandate that the Commodity Futures Trading Commission (CFTC) will have a hand in enforcing.

CFTC officials have previously indicated that the agency would revisit its cross-border regulation approach.

CFTC Chairman Christopher Giancarlo said in September 2018 that the agency was guilty of overreach by regulating firms that were not based in the United States but did business with U.S. customers. It also published a study on potential interagency regulation of the cross-border swaps market in October 2018.

While the CFTC is the primary regulator of the U.S. derivatives market, the SEC’s proposal on cross-border swaps comes after both Giancarlo and Clayton late last year emphasized the need for clarity and stability in global financial market supervision ahead of Britain’s divorce from the European Union, commonly referred to as Brexit.

The move shows the need for interagency oversight over potential changes to cross-border EU-UK derivatives rules.

The SEC’s proposal focuses on transactions that have been “arranged, negotiated, or executed” by U.S. based personnel of foreign firms by requiring non-U.S. resident security-based swap dealers and major security-based swap participants to provide regulators with records as well as onsite examinations, among other changes.

“The proposed changes to our cross-border derivatives rules will create additional incentives for institutions to structure their activities to avoid U.S. oversight,” said SEC Commissioner Rob Jackson, an independent who votes as a Democrat and is critical of the proposal.

“That’s good for lawyers, but not for our markets.” (Reporting by Katanga Johnson Editing by Susan Thomas)