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04 September 2019
The Securities and Exchange Commission (SEC) continues to take steps towards the implementation of its security-based swap (SBS) dealer registration framework. A particular area of concern for market participants has been how the SEC's requirements will apply in the cross-border context. In a recent proposal,(1) the SEC has sought to address certain questions as to the cross-border implementation of its SBS regime and, in some cases, to further harmonise its regulations with the Commodity Futures Trading Commission's swaps regulatory framework.
The proposal covers four areas of the SEC's SBS regime, including:
The proposal would clarify the use of the ANE test for the cross-border application of several of the SEC's Title VII rulemakings, including the SBS dealer de minimis registration threshold. In general, pursuant to rules already adopted, ANE transactions may be subject to SEC requirements (including being counted towards the de minimis registration threshold), even if the transaction is otherwise between two non-US persons.
The SEC is proposing to provide guidance in respect of ANE transactions in order to further clarify the types of market-facing activity that may constitute arranging or negotiating an SBS. Specifically, the proposed guidance would take the position that a person may provide 'market colour'(3) in specific circumstances without that activity constituting arranging or negotiating SBS transactions for purposes of some of the SEC's regulations, including counting resulting transactions towards the SBS dealer de minimis threshold. Such requirements will not be triggered if:
In addition, the SEC has proposed two alternatives to its existing approach to counting certain ANE transactions for purposes of the SBS dealer de minimis threshold calculation:
Under both proposed alternatives, the non-US person and majority-owned affiliate would still be required to comply with certain other Title VII requirements, including those relating to business conduct, trade acknowledgements, portfolio reconciliation, disclosure, records and financial responsibility.(4) In addition, the non-US person and majority-owned affiliate, on request, would be required to promptly provide the SEC with relevant information or documents within their control relating to the transactions. The affiliated SBS dealer would also be subject to certain counterparty disclosure requirements and the non-US person relying on either exception would have to be subject to the margin and capital requirements of a listed jurisdiction(5) when engaging in transactions subject to either exception.
Further, the SEC requested comment on whether the agency should propose additional conditional exceptions for certain other requirements that apply to ANE transactions, such as regulatory reporting, public dissemination and SBS dealer business conduct requirements.
Certification and opinion of counsel
The proposal will provide guidance intended to clarify the application of the SEC's certification and opinion of counsel requirement for each non-resident SBS entity applicant that it can and will provide the agency with prompt access to its books and records and submit to onsite inspections and examinations.(6) The guidance would clarify certain aspects of this requirement, including the following:
Such an approval or memorandum would need to be consistent with the SEC's registration programme.
Further, the proposal would provide a non-resident SBS entity with additional time to submit the certification and opinion of counsel. Under the proposal, if a non-resident applicant is unable to provide such certification and opinion of counsel at the time of registration, the applicant would be conditionally registered for up to 24 months following the proposal's compliance date, under the condition that the applicant submits a Form SBSE-C and either a Form SBSE, SBSE-A or SBSE-BD that is complete except for the certification and opinion of counsel.
Rule of Practice 194
The SEC is proposing to amend Rule of Practice 194, which establishes the process for SBS entities to apply to the SEC for a waiver that would allow a statutorily disqualified natural person under Section 15F(b)(6) of the Securities Exchange Act of 1934 (the Exchange Act) to effect or be involved in effecting SBS on behalf of the SBS entity, subject to certain conditions.
The proposal would add an additional exclusion for an SBS entity with respect to an associated person that is a natural person that:
However, this exclusion does not apply if the associated person of the swap entity is currently subject to any order that prevents them from participating in US or foreign financial markets,(7) unless such an order by a foreign financial regulatory authority applies only in the jurisdiction where the associated person is located or employed.
Questionnaire or application for employment
As part of its earlier proposed cross-border recordkeeping and reporting requirements for SBS entities, the SEC proposed the new Exchange Act Rule 18a-5, which would establish recordkeeping standards for standalone and bank SBS entities. Such standards would require that a standalone or bank SBS entity make and keep current a questionnaire or application for employment for each associated person that is a natural person, and for bank SBS entities, each associated person that is a natural person and whose activities are associated with the bank SBS entity's business as an SBS entity.
In order to provide greater flexibility, the SEC is proposing to provide the following exemptions to proposed Rule 18a-5:
The proposed amendments and guidance represent a continuation of the agency's efforts to implement its SBS requirements. At present, it is expected that SBS registration requirements will not be fully implemented until a number of other rulemakings are finalised.
For further information on this topic please contact Donna M Parisi, Geoffrey B Goldman, Azam H Aziz or Jennifer Oosterbaan at Shearman & Sterling LLP by telephone (+1 212 848 4000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Shearman & Sterling LLP website can be accessed at www.shearman.com.
(1) SEC, "SEC Proposes Actions to Improve Cross-Border Application of Security-Based Swap Requirements" (10 May 2019).
(2) Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons To Effect or Be Involved in Effecting Security-Based Swaps, 84 Fed Reg 4906 (19 February 2019). For more information, please refer to our earlier update, available here.
(3) The term 'market colour' means background information regarding pricing or market conditions associated with particular instruments or with markets more generally, including information regarding current or historic price volatility or market depth and trends or predictions regarding pricing, volatility or market depth, as well as other types of information reflecting market conditions and trends.
(4) However, the non-US person and majority-owned affiliate would not be subject to certain other counterparty-related requirements applicable to SBS dealers, such as eligible contract participant verification and know-your-counterparty requirements.
(5) The SEC's initial consideration of whether to designate a particular jurisdiction as a listed jurisdiction would focus on the jurisdiction's applicable margin and capital requirements and the foreign regime's supervisory compliance programme and enforcement authority in connection with those requirements.
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