We all knew that one kid on the block who made up the rules to every game as we went along. And obviously that kid was a bully—freakishly big and strong for his age, so the rest of us had to submit to his demands lest we be excluded altogether. Did you ever think you’d see the day he would finally learn to play nice with others? When he would stop feeling the need to control everything? Me neither, but that day has arrived!
In May, the SEC announced potential changes to rules that regulate transactions involving foreign security-based swaps (SBS). The proposed changes come in response to criticism over the current rules. Some people have expressed concerns that they are neither adequately aligned with the Commodity Futures Trading Commission’s (CFTC’s) swaps regulations nor sufficiently accommodating to certain foreign laws. If enacted, the rule changes would have a notable impact on business operations.
The SEC proposed four separate changes to the current rules and regulations. The first change will influence whether non-U.S. personnel are to be considered security-based swaps dealers (SBSD’s). Currently, they must count their SBS dealings with non-U.S. persons if those swaps were arranged, negotiated, or executed (ANE) by someone in the U.S. Why does it matter whether a person is considered an SBSD? Well, anyone registered as such is subject to the Title VII requirements of the Dodd-Frank Act. However, it can be logistically difficult to accurately calculate the number of swaps that were ANE within the U.S., and some experts fear that the current method of determination can lead to market fragmentation and reduced liquidity in the swaps market. Furthermore, the rule fails to take related foreign laws into account. So, the SEC is proposing that dealings need not be counted merely due to U.S. personnel providing pricing and market information (provided that they are not being compensated to do so). An alternative potential amendment would no longer require foreign personnel to count transactions as long as all related ANE activity within the U.S. is performed by someone associated with an entity that is registered with the SEC as either an SBSD or a broker.
The second rule change would affect reporting regulations for foreign SBS entities. Currently, all SBS entities outside the U.S. must prove that they can provide certain documentation and records to the SEC upon inspection. However, differences in laws from country to country can create significant impediments to the reporting process. Therefore, the SEC plans to ease the process by working more closely with non-U.S. SBS entities facing laws contradictory to the SEC’s.
The SEC’s third proposed change addresses restrictions on who can be involved in an SBS transaction. Presently, it is illegal for an SBSD to involve an individual in effecting an SBS transaction if that individual is disqualified from SBSD status. However, in an effort to align with CFTC’s protocol on the matter, the SEC will make an exception to the rule for people who are natural non-U.S. residents (provided that they do not affect SBS transactions specifically with U.S.-based counter-parties). In other words, an SBSD can involve someone who is not registered as an SBSD if the non-SBSD does not enter into a swaps contract with a U.S.-based counterparty.
The fourth and final change makes it easier for SBS participants to remain in compliance with foreign laws. As the law currently stands, SBS participants must keep a questionnaire or employment application for any person involved in the swap. Unfortunately, maintaining these records can be complicated by, or even violate, certain foreign laws. So, the SEC will no longer require maintenance of those records if doing so violates a foreign regulation.
To summarize, the SEC’s proposed rule changes will facilitate compliance in foreign swaps transactions and coordinate with regulations established by both the CTFC and foreign regulatory regimes. Consequently, the swaps market will see improvements in efficiency. And this would be a great thing for IMP’s clients. The increased efficiency will certainly benefit traders, and compliance teams will have less stringent rules to contend with.
Naturally, the game suddenly becomes more fun for everybody once the big kid backs off a little. Maybe he’s not such a bad guy after all.
