Reuters: Regulatory News: UPDATE 1-U.S. SEC proposes rules for cross-border swap trades

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UPDATE 1-U.S. SEC proposes rules for cross-border swap trades May 1st 2013, 16:23 Wed May 1, 2013 12:23pm EDT By Sarah N. Lynch WASHINGTON May 1 (Reuters) - The Securities and Exchange Commission proposed new rules on Wednesday for the over-the-counter derivatives business of foreign banks, with the U.S. regulators saying they hoped the plan could provide a road map to resolve a brewing international conflict over how to regulate the $640 trillion market. The SEC's proposed rules would apply to cross-border swap trades such as equity swaps or credit-default swaps that can be used to hedge against the risk of a company defaulting on its bonds. 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. Europeans and the CFTC have butted heads over the issue for the past year, with CFTC Chairman Gary Gensler calling for foreign banks to abide by most U.S. rules. European regulators have countered that the CFTC's aggressive approach could create duplicative regimes and have urged the United States to let them regulate the banks on their own turf. The SEC's proposal would generally subject U.S.-based businesses to the commission's derivatives rules. But it would also give quite a bit of deference to foreign regulators to police banks in their own countries through so-called "substituted compliance." "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. "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." IN THE WAKE OF THE WHALE The debate over how to apply U.S. derivatives rules to banks overseas has been heating up, particularly after a Senate investigative panel released a report earlier this year exploring how a credit derivatives trader dubbed "The London Whale" cost JPMorgan Chase & Co $6.2 billion in trading losses out of a London office. In a letter to Gensler last week, the chairman of that panel, Senator Carl Levin, Democrat of Michigan, urged the CFTC not to give into pressures to scale back its cross-border plan, saying the London Whale episode teaches a valuable lesson on why foreign offices of U.S. banks should not be able to escape U.S. regulations. The SEC and the CFTC won broad new powers in the 2010 Dodd-Frank Wall Street reform law to police the $640 trillion over-the-counter derivatives market. The law requires swap dealers and major traders to set aside capital and post margin on some of the more complex derivatives trades. Many other swaps, meanwhile, must be routed through clearinghouses to protect against default and traded on regulated platforms to improve price transparency. 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, while the SEC is in charge of security-based products like equity swaps and certain kinds of credit derivatives. 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. In addition to proposing its cross-border plan on Wednesday, the SEC is also extending the public comment period on every over-the-counter derivatives proposal that is still in the works so the industry can do a side-by-side comparison. 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 and protect its reputation. 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. Link this Share this Digg this Email Reprints

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