Cross-Border Security-Based Swaps: SEC Adopts Initial Final Rules on Cross-Border Security-Based Swap Activities

Sullivan & Cromwell LLP - July 22, 2014

On June 25, 2014, the Securities and Exchange Commission issued a release with final rules and interpretations on the cross-border application of certain security-based swap provisions under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rulemaking set forth in the release, which was published in the Federal Register on July 9, is the first of what the SEC expects to be a series of rulemakings by the SEC on the cross-border application of the substantive requirements imposed on security-based swap activities by Title VII.

Among other things, the release addresses:

  • the definition of “U.S. person” in the context of the cross-border security-based swap regime;
  • the application of the cross-border regime to foreign branches, affiliates and subsidiaries of U.S. and non-U.S. persons;
  • the impact of guarantees in the cross-border context;
  • the treatment of cross-border security-based swap transactions for purposes of the registration obligations of security-based swap dealers and major security-based swap participants;
  • the aggregation and attribution rules to be used in determining security-based swap dealer and major security-based swap participant status in the cross-border context;
  • the treatment of security-based swap transactions by “conduit affiliates” of U.S. persons;
  • procedural requirements for seeking “substituted compliance” by which security-based swap market participants may satisfy certain obligations under Title VII by complying with comparable non-U.S. regulatory regimes; and
  • the scope of the SEC’s cross-border anti-fraud authority.
Importantly, however, the final rules do not address how Title VII will treat security-based swap transactions between two non-U.S. persons where one or both of the non-U.S. persons conducts dealing activities in the United States. The SEC solicits additional comment on the topic.

The SEC’s approach in the final rules differs in certain respects from the approach taken by the Commodity Futures Trading Commission in its analogous final rules for the regulation of cross-border swaps, swap markets, and swap market participants. Annex A describes some of the important differences between the SEC and CFTC approaches.

The final rules will become effective on September 8, 2014.