Cadwalader attorneys analyzed recently proposed amendments to the SEC rules governing security-based swaps ("SBS") entered into by non-U.S. firms.
As previously covered, the proposals would increase the activities that a U.S. agent could conduct without the SEC considering the SBS to have been "arranged, negotiated or executed" ("ANE") in the United States and, consequently, without triggering U.S. regulatory requirements. The proposals also would modify, and in some cases reduce, the regulatory requirements that would apply where a non-U.S. swap dealer entered into a transaction with another non-U.S. person, where there had been ANE activity as to the transactions in the United States. The attorneys noted that the proposed modifications are modeled on the "chaperoning" provisions in Exchange Act Rule 15a-6(a)(3).
The proposals also would modify SEC requirements imposed on non-U.S. SBS dealers as to statutory disqualifications and as to certain opinion of counsel requirements.
The memorandum was authored by Steven Lofchie and Nihal Patel.
Commentary / Nihal Patel
This is, in general, a practical set of proposals by the SEC, certainly an improvement on what it had previously adopted. In trying to come up with a reasonable solution for dealing with cross-border swaps, the SEC is seemingly at a disadvantage because Dodd-Frank did not provide for a category of regulated entity that might be called "security-based swap brokers," as opposed to SBS dealers. The creation, whether by statute or regulation, of a category of regulated entities that could take on sales practice responsibilities for SBS without becoming subject to capital and margin requirements, would give the SEC a much more nuanced ability to draft appropriate rules for the SBS market. This would particularly be the case in transactions where a non-U.S. SBS dealer was principal to the transaction, or even where a U.S. bank was acting as an SBS dealer, but would conduct all of its sales activities through a separate affiliated agent.
Commentary / Steven Lofchie
The SEC likely recognized that the ANE rules, as currently contemplated, would give a strong incentive for non-U.S. firms to move certain activities (and jobs) outside of the United States. Currently, a significant amount of SBS dealing activity between European and Asian dealers, on the one hand, and Latin American and Canadian customers, on the other, takes place from sales offices within the United States. These are good jobs. It doesn't make a lot of sense to risk losing these jobs by imposing U.S. regulatory requirements that don't serve any material U.S. policy interest.
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