In a comment letter on a recent SEC proposal on cross-border issues involving security-based swaps (SBS), SIFMA and the Institute of International Bankers (IIB) urged the SEC to further harmonize its rules with the CFTC by eliminating certain aspects of the requirements altogether. Alternatively, the groups recommended many detailed changes.
SEC proposal. In May 2019, the SEC proposed rule amendments and interpretive guidance to adjust the regulatory framework for cross-border SBS transactions and market participants. The proposed changes would create exceptions for certain transactions from being counted toward the de minimis threshold for registration, business conduct, and reporting requirements; limit the requirement for non-resident entities to provide opinion of counsel letters regarding books and records access; and harmonize SEC rules with the CFTC’s approach to the statutory disqualification of non-domestic associated persons of CFTC-registered swap entities.
According to SEC Chairman Jay Clayton, the proposed changes would address practical implementation challenges while preserving important investor and market protections.
Industry concerns. SIFMA and IIB believe the proposed changes do not go far enough to mitigate burdens for market participants arising from the cross-border application of SBS requirements.
“Even as modified by the Proposal […] these requirements seem likely to result in significant and undue operational burdens, risk management and execution challenges, and unwarranted competitive distortions in the global SBS markets, for dealers as well as their investor and corporate counterparties,” the groups wrote.
According to the groups’ comment letter, the requirements could deter non-U.S. counterparties from having interactions with U.S. personnel. If, as a result, non-U.S. security-based swap dealers (SBSDs) withdrew from the U.S. market, this would have a “devastating” effect on market liquidity, competition for investors, and U.S. jobs. The groups said that by the SEC’s own economic analysis, 88 percent of the market for North American corporate single-name credit default swaps involves at least one non-U.S. counterparty.
ANE transactions. “ANE transactions” are transactions connected with a non-U.S. person’s dealing activity that are “arranged, negotiated, or executed” by personnel located in a U.S. branch or office of the non-U.S. person or its agent.
The industry groups urged the SEC to harmonize with the CFTC by scrapping its own requirements in this area. Short of that, the groups recommended the SEC do the following:
- Adopt the proposed conditional exception from the de minimis calculation for ANE transactions involving a U.S. broker-dealer or SBSD affiliate, but with certain modifications relating to suitability and portfolio reconciliation rules;
- Harmonize the External Business Conduct Standards (EBC) requirements that apply to a registered non-U.S. SBSD’s ANE transactions with those that apply under the proposed SBSD de minimis counting exception, with certain modifications;
- Exclude ANE transactions from Regulation SBSR reporting requirements where one or both parties are organized or located in a jurisdiction that applies trade reporting rules to SBS;
- Adopt the Proposal’s market color guidance.
If the SEC does not follow this recommendation, the groups recommended detailed changes including:
- Narrow the jurisdictions covered by the requirements;
- Exclude some records from the definition of “books and records;”
- Clarify the relevance, scope, and timing of consents;
- Provide targeted relief for protected personal data;
- Adopt the proposed 24-month conditional registration period;
- Eliminate requirements in connection with applications for substitute compliance; and
- Require notifications of changes in foreign law.
- Clarify that a non-U.S. SBSD need only obtain consents necessary for access, provide 24 months after registration to obtain consents, and allow masking until consents are obtained;
- Clarify that an SBSD should only be required to provide access to its books and records in any one jurisdiction; and
- Provide relief from direct record access requirements for protected personal data.
- Modify Rule of Practice 194 and Rule 18a-5 as proposed; and
- Further harmonize with CFTC rules, as specified.