Foreign banks that conduct over-the-counter derivatives trades with U.S. entities will now be required to register with the Securities and Exchange Commission, a move that also comes with new demands for transparency and mandatory clearing intended to reduce the risk of default.

The new requirements, which cover when a transaction must register as a security-based swap dealer or major security-based swap participant, are the first of a series of long-awaited rules and guidance on cross-border security-based swaps the SEC plans to issue. The rules also address the scope of the SEC's cross-border anti-fraud authority.

The SEC also adopted a procedural rule regarding the submission of “substituted compliance” requests. This rule represents a first step in the SEC's efforts to establish a framework to address the possibility that market participants may be subject to more than one set of comparable regulations across different jurisdictions. If the SEC were to grant a request for substituted compliance, it would permit market participants to satisfy certain U.S. security-based swap requirements by complying with comparable non-U.S. rules.

In developing its requirements, the SEC took into account related rules and guidance issued by the Commodity Futures Trading Commission. Many of the steps needed to comply with the CFTC's cross-border guidance may be transferable to compliance with the SEC's final cross-border rules, potentially mitigating the cost of compliance.

The rules adopted this week will be effective 60 days after their publication in the Federal Register, with the exception of dealer and major participant definitions and procedures for submitting substituted compliance requests. Those requirements will not be in effect until related rules are finalized.