With long-awaited trading rules, SEC positions itself as an extraterritorial regulator

Nearly three years after Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities Exchange Commission (SEC) has at last proposed new trading rules for foreign banks that do business with US entities in the over-the-counter (OTC) derivatives market. On 1 May 2013, the SEC issued an extensive set of proposals applicable to market participants engaged in the cross-border trading of security-based swaps. These proposals provide guidance for foreign and domestic entities, but also offer insight into the SEC’s own interpretation of its role as a regulator of extraterritorial activity in the securities markets.

On May 1, 2013, the SEC issued an extensive set of proposals applicable to market participants engaged in cross-border trading of security-based swaps. These proposals provide guidance for foreign and domestic entities, but also offer insight into the SEC’s own interpretation of its role as a regulator of extraterritorial activity in the securities markets.

Title VII of the Dodd-Frank Act sets forth a series of regulations concerning the cross-border derivatives market, which prior to 2010 was largely unregulated. This market, which is estimated to involve US$630 trillion of activity worldwide, generally involves trading, outside of a formal exchange, of derivatives by a foreign entity with a US-based person or institution. Since the financial crisis of 2008, global regulators have issued a series of directives and guidelines concerning derivatives trading intended to increase transparency and reduce systematic risks. Dodd-Frank categorizes derivatives as either “swaps,” to be regulated by the Commodity Futures Trading Commission (CFTC), or “security-based swaps,” to be regulated by the SEC…

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