The Securities and Exchange Commission is seeking to better define the requirements for security-based swap transactions that involve a foreign entity’s dealing activity in the United States. 

Swaps between a U.S. party and a foreign party encompass approximately 50 percent of the global security-based swaps market. A proposed rule, unanimously approved by commissioners last week, would build upon similar 2014 rulemaking and address what to do when only certain activities involving a security-based swap transaction occur within the U.S. The rules require a non-U.S. company that uses U.S. personnel to arrange, negotiate, or execute a transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer. The move is seen, in part, as a response to complaints from large U.S. banks who argued that the previous proposal favored foreign institutions at their expense.

New requirements would establish that when a security-based swap is arranged, negotiated, or executed by personnel located in the U.S., the transaction should be subject to both reporting and public dissemination requirements. The transaction would also be counted towards the amount of security-based swaps activity in the U.S. used to trigger the Commission’s dealer registration requirement.

“The rules are designed to prevent restructuring charades to avoid Title VII [of the Dodd-Frank Act] by plugging the loopholes allowing registered SBS dealers to book transactions overseas, but otherwise handle the transactions in the U.S. This will prevent dealers from accumulating hidden risks that could ultimately be borne by the U.S. financial system, SEC Commissioner Luis Aguilar said prior to last week’s vote.

The proposed rule clarifies:

When non-U.S. persons would be required to count a security-based swap transaction with another non-U.S. person toward the requirement to register as a security-based swap dealer based on the dealer’s activity in the United States;

Which transactions of a registered security-based swap dealer are subject to external business conduct standards;

When security-based swap transactions must be reported to a registered security-based swap data repository and publicly disseminated.

The SEC will open a 60-day comment period once the proposed rule is published in the Federal Register.