(Reuters) - The US Securities and Exchange Commission on Wednesday approved rules governing swaps that involve foreign dealers with trading desks on US soil.
Under the rules, transactions between non-US companies that use US personnel to arrange, negotiate or execute swaps trades will have to hew to some regulations. They are intended to address trades from US-based desks that are conducted with foreign firms, such as a Cayman Island hedge fund, and then booked overseas with the banks’ foreign affiliates.
SEC Chair Mary Jo White said the rules would help avoid “a world in which market participants are able to exit our regulatory framework without also exiting the US security-based swap market.”
The top securities regulator proposed the rules in 2013 and then revised the draft in April in an effort to better fit the highly illiquid derivatives markets that the SEC oversees.
Some critics have said that arranging such trades on US soil while booking them abroad creates a loophole for banks to get around the rules. Others, meanwhile, say putting these trades under US oversight is regulatory overreach.
The SEC only oversees a small subset of the market involving derivatives whose values are pegged to securities such as credit-default or equity swaps. The Commodity Futures Trading Commission regulates the bulk of the derivatives market.
But White said that much of the transaction volume in the global security-based swap market occurs in the United States.
Specifically, the SEC proposed counting deals involving US-based personnel when determining if a foreign firm must register with the commission as a security-based swap dealer. Already foreign companies have to register if they exceed a threshold that is calculated by their swaps with U.S. counterparties and with non-US companies acting as conduits of US firms.
“Registration triggers important obligations and responsibilities for the good of the overall marketplace, the entities that may transmit those risks, as well as enhancing resilience in times of stress. This rule appropriately considers the risks to the US financial markets,” said Commissioner Kara Stein in voting for the rule.
Reporting by Lisa Lambert; Additional reporting by Sarah N. Lynch
