Amid pushback from overseas regulators and financial entities, the Securities and Exchange Commission has proposed new rules for cross-border, over-the-counter security-based swap transactions, an effort that aims to avoid overlapping and contradictory regulations.

The nearly 1,000-page proposal, approved by a unanimous vote on Wednesday, will now undergo a public comment process.

Under Title VII of the Dodd-Frank Act, the SEC has regulatory authority over the derivatives known as security-based swaps, as well as security-based swap dealers, major security-based swap participants, and related clearing agencies, execution facilities, and data repositories.  

These swaps are tied to a single security, loan, or issuer of securities, or a narrow-based security index. The market often involves counterparties located in different countries and activities that are global in nature. According to SEC data, the majority of U.S. transactions involve one or more counterparties located abroad.

The global interconnectedness of the marketplace has made regulatory efforts an ongoing challenge for the SEC and the Commodity Futures Trading Commission. To address risks, they and their counterparts in other countries are at various stages in the implementation of derivatives regulatory reform efforts. This, however, could mean market participants are subjected to multiple, overlapping, and likely conflicting regulatory regimes.

The SEC's proposal offers a “substituted compliance” framework. Security-based swap transactions involving activity within the U.S. would generally be subject to U.S. regulation. However, a party may instead satisfy the SEC's requirements by complying with some or all of those in place by foreign regulators, provided that the Commission views this regime as fostering comparable outcomes.

If the home country does not have requirements that achieve comparable regulatory outcomes, substituted compliance would not be permitted and the foreign entity would be required to comply with the applicable U.S. requirements.

In making the comparability determination, the SEC would separately assess four categories of Title VII requirements. If a regime achieves comparable regulatory outcomes in three out of the four categories, the SEC would permit substituted compliance for just those three categories. The Commission stressed that it is “not proposing an ‘all-or-nothing' approach.”

The four categories are: requirements applicable to registered non-U.S. security-based swap dealers; requirements relating to regulatory reporting and public dissemination of security-based swap data; requirements relating to mandatory clearing for security-based swaps; requirements relating to mandatory trade execution for security-based swaps.

Under the proposal, the Commission has the ability to modify the terms of, or withdraw, a substituted compliance determination after appropriate notice and opportunity for comment.

The proposed rule comes just days after overseas officials fretted about the potential for regulatory overreach by the U.S. in an April 18  letter to U.S. Treasury Secretary Jack Lew.

Among those who signed the letter were Michael Barnier of the European Commission, Wolfgang Schauble, Germany's finance minister, Pierre Moscovici, France's minister of finance, Guido Mantega, Brazil's finance minister, and Taro Aso, deputy prime minister and minister of state for financial services in Japan.

“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,” they wrote. “Market places where firms from all our respective jurisdictions can come together and do business will not be able to function under such burdensome regulatory conditions.”

They urged a “coherent collective solution” and said mutual recognition, substituted compliance, exemptions, “or a combination” would offer a valid approach.”

Separately, the Commission on Wednesday also voted unanimously to reopen the public comment period for all rules stemming from Title VII of the Dodd-Frank Act that are not yet finalized. The comment periods for these rules, and a policy statement describing the expected order for these new rules to take effect, will be reopened for 60 days after a notice is published in the Federal Register.

Michael O'Brien, a partner with the law firm Winston & Strawn who specializes in multinational corporations and derivatives transactions, views the proposed rules as illustrative of the differing approaches taken by the SEC and CFTC as they implement Dodd-Frank provisions. 

The CFTC has issued multiple regulations that treat the swaps market as uniform, “without regard to well established differences in market practices,” he says, adding that “almost every deadline set by the CFTC has been characterized by last minute extensions, but only after rattling the markets.”

“In contrast, the SEC has issued few regulations to date and the regulations that have been issued are more accommodating of market differences,” he says.