Swap Dealers’ Overseas Branches Gain Exemptions in SEC Plan
JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and other U.S. swap dealers would gain limits on the Dodd-Frank Act’s reach for overseas trades under a proposal released by the Securities and Exchange Commission.
The SEC’s five commissioners voted unanimously yesterday to seek comment on measures that could exempt overseas affiliates, including those guaranteed by U.S. banks, from registration when they conduct business predominantly with foreign clients. Overseas branches of U.S. banks could be exempt from Dodd-Frank standards for conduct with clients.
“This approach would allow the elimination of overlapping regulation when it truly is duplicative, while recognizing that regulatory regimes will necessarily differ in some respects,” SEC chairman Mary Jo White said at a meeting in Washington.
The SEC, which is writing rules for equity and some credit-default swaps, said it hopes the 1,000-page proposal will influence how global regulators address rule differences while working to reduce risk and increase transparency in the swaps market. The Commodity Futures Trading Commission is the predominant U.S. regulator for the $639 trillion global swaps market; the SEC oversees securities-based swaps that amount to about 5 percent of the market.
“I anticipate that the SEC rule will be more reflective of industry concerns than the CFTC guidance and the comments it generated,” Donald N. Lamson, Washington-based partner at Shearman & Sterling LLP, said yesterday in a phone interview.
The SEC’s proposal was applauded by Ken Bentsen, acting president and chief executive officer of the Securities Industry and Financial Markets Association, which represents firms such as JPMorgan, Citigroup Inc. and Bank of America Corp.
“We believe that foreign regulations should be assessed on a comprehensive, ultimate outcome-level basis, not rule-by-rule nor transaction-by-transaction,” Bentsen said in a statement. “This will be critical to working effectively with foreign regulatory bodies to oversee global markets for these products.”
Dodd-Frank, the regulatory expansion enacted in response to the 2008 credit crisis, calls on the SEC and CFTC to have most swaps guaranteed at clearinghouses, traded on exchanges or other platforms and reported to regulators.
Swaps trading has been a major source of revenue for large U.S. banks, and some have conducted roughly half of such trades overseas, often through branches or subsidiaries. JPMorgan, the nation’s biggest bank by assets, often derives as much of its quarterly revenue from global operations as from those in the U.S., Associate General Counsel Don Thompson said last year.
The U.S. agencies have come under pressure to limit their international reach from European, Asian and South American regulators as well as New York-based JPMorgan and Goldman Sachs.
Swaps rules under consideration by the SEC and CFTC are fragmenting the global market, nine overseas finance officials said in an April 18 letter urging Treasury Secretary Jacob J. Lew to limit Dodd-Frank’s reach.
“An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable,” the officials wrote to Lew, who has no formal role in SEC and CFTC rulemaking.
The proposal approved yesterday would govern how other SEC swap rules, many of which haven’t been completed, apply in cross-border transactions.
The SEC outlined plans for allowing so-called substituted compliance, in which the agency would recognize comparable overseas laws and enforcing its own rules when foreign standards aren’t sufficient. The proposal seeks to avoid a “line-by-line” comparison of U.S. and foreign laws and take a more flexible approach based on the outcomes of the rules, White said.
Patrick Pearson, head of the European Commission’s financial markets infrastructure unit, said during testimony at a House hearing in December that regulators should aim for one set of rules in cross-border transactions. The CFTC’s version of substitute compliance was “too modest” and should be “applied more broadly,” Pearson said.
The SEC’s proposal raises the potential for risk flowing back to the U.S. because of its treatment of overseas affiliates and branches, said Commissioner Luis Aguilar, part of the Democratic majority on the five-member panel.
“Under the proposed rules, two non-guaranteed foreign subsidiaries of two separate U.S. entities could engage in unlimited amounts of security-based swap transactions with each other,” Aguilar said at the meeting. “The proposed rules seem to assume that any failure by these foreign subsidiaries would not financially affect the U.S. parents.”
Barclays Plc (BARC), UBS AG (UBSN), Credit Suisse Group AG (CSGN) and other overseas-based dealers began registering with U.S. regulators at the end of last year. CFTC Chairman Gary Gensler said his agency shouldn’t extend a July 12 deadline for other rules to take effect.
“I think that we’ve got a good approach at the CFTC, but also we have a different law than the SEC,” Gensler said yesterday. “There may be differences.”
The CFTC is willing to work with overseas officials to determine when foreign rules are similar enough that U.S. regulators let them satisfy Dodd-Frank’s goals, Gensler said.
The CFTC should take time to review comments that the SEC receives before completing its own rules, according to Jill E. Sommers, one of two Republican commissioners at that agency.
“There is no justification for this commission to be on a different page from the SEC,” Sommers said.
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