On May 1, the Securities and Exchange Commission proposed rules and interpretive guidance with respect to cross-border security-based swap activities. Under this proposal, the requirements of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act would generally apply to any security-based swap transaction entered into with a US person or otherwise conducted within the United States. For this purpose, a US person would include natural persons residing in the United States, entities organized or incorporated or having their principal place of business in the United States and accounts of US persons. Further, a transaction would be conducted in the United States if it is solicited, negotiated, executed or booked within the United States, regardless of the location of the counterparties to the transaction.

The proposal also provides a “substituted compliance” regime under which market participants may, under certain circumstances, comply with foreign regulatory requirements in lieu of complying with comparable Title VII requirements. Under this regime, a foreign market participant would be permitted to comply with its home country regulatory requirements so long as the SEC has determined that such requirements are broadly similar to those of Title VII. The SEC has indicated that it will make this determination by assessing whether a foreign regulatory scheme is comparable to the regulatory scheme set forth in Title VII in any of the following categories: (i) security-based swap dealer registration; (ii) security-based swap data reporting; (iii) mandatory clearing of security-based swaps and (iv) mandatory execution of security-based swaps on certain trading venues. The SEC would make such determination based on a holistic approach that compares regulatory outcomes rather than by making rule-by-rule comparisons.

Under the proposal, foreign market participants that may be security-based swap dealers would only be required to assess their swap dealing activities conducted with US persons or within the United States for purposes of determining whether they exceed the de minimis registration threshold. The same principle applies to foreign persons that may be major security-based swap participants, except that they would also be required to take into consideration their transactions with foreign persons guaranteed by US persons when making this determination. Foreign security-based swap dealers and major security-based swap participants would be required to comply with entity-level requirements under Title VII or a substituted compliance regime, whereas such entities would generally be required to comply with transaction-level requirements only with respect to their US business or transactions with US counterparties.

The proposal would provide a rule and interpretive guidance regarding when entities that perform infrastructure functions, such as swap execution facilities and swap data repositories, would be required to register with the SEC, and generally takes a territorial approach with respect to this matter. Thus, for example, a swap execution facility may be required to register as such in the United States if it provides US persons or non-US persons located in the United States with the direct ability to trade or execute security-based swaps on the foreign security-based swap market. The proposal also provides that infrastructure entities may be exempt from such registration if they are subject to comparable regulation in their home countries.

The full text of the SEC proposed rules and interpretive guidance is available here.