SEC Acting Director of the Division of Trading and Markets John Ramsay delivered remarks at the NYC Bar Association on the Commission’s recent set of proposals on the cross-border regulation of derivatives.
Equivalence vs. Substituted Compliance
Director Ramsay discussed the status of international regulatory efforts, both in developing their derivatives regimes and in grappling with the cross-border regulation of derivatives trading. Two significant points that he made by way of introduction: (i) none of the other jurisdictions have proposed rules to describe how they would regulate cross-border transactions and (ii) much, and potentially most, trading in derivatives has some international component. (It follows from this that it is not really clear how practical it is for the United States to attempt to implement its system of derivatives regulations where this implies going forward without regard to co-ordinating with other financial regulators around the world.)
The majority of the Director’s speech concerns the question of how the United States should regulate non-U.S. entities and, conversely, how non-U.S. jurisdictions might regulate U.S. entities. As to this, he posits two potential approaches: “equivalence” and “substituted compliance.” Under the “equivalence approach,” the United States would impose its own rule on a non-U.S. swaps entity unless the non-U.S. jurisdiction imposed an equivalent rule on that entity; further, this determination of equivalence would be made on a rule-by-rule basis. By contrast, under a “substituted compliance” approach, the U.S. would look at four broad areas of regulation, and, so long as the non-U.S. jurisdiction imposed roughly comparable measures as to any of the four areas, then the U.S. would generally not regulate the non-U.S. entity in that area.
In his speech, Director Ramsay advocated the substituted compliance approach, which has been put forward by the SEC. (By contrast, the CFTC in its earliest statements on cross-border regulation, indicated that it would take the equivalence approach, though the CFTC has seemingly backed away at least partially from that position.)
SEC Proposal on Cross-Border Regulation of Derivatives
Leaving aside issues of general policy, Director Ramsay also briefly described the specifics of the SEC’s recent proposal on cross-border regulation. Among the topics that he discussed were (i) the SEC’s general territorial approach to regulation, (ii) the treatment of foreign branches and guaranteed subsidiaries, (iii) the SEC’s proposed definition of “U.S. person,” and (iv) the ways in which different types of regulations might be imposed; e.g., that trade reporting would be imposed on a broader range of transactions than would capital requirements.
Lofchie Comment: Notwithstanding the existence of the very different big-picture approaches initially proposed by the CFTC and the SEC, it is unimaginable that the two Commissions will not come to some understanding to adopt something fairly close to the SEC’s suggested approach. The CFTC’s initial notion, however well-intended, that it could examine every non-U.S. rule adopted by every non-U.S. regulator for “equivalence” is simply unworkable. Worse than being merely unworkable, it will provoke European and Asian retaliation against U.S. financial institutions. Not much good can come of a trade war in financial services.
The saddest thing about this policy conflict is that it has nothing to do with the bigger problem: our regulation of purely domestic swaps is the result of an ill-conceived statute hastily adopted that has imposed on the United States a more absurd regulatory system than we had before the financial crisis.
See: Cross-Border at the Crossroads: The SEC’s “Middle Ground”
For our news story on the SEC’s cross-border proposal, see: SEC Proposal on Cross-Border Security-Based Swaps (with Commissioners’ Comments)