Regulating Cross-border OTC Derivatives Activity

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The US Securities and Exchange Commission (SEC) released on May 1st 2013 its proposal on cross-border OTC regulation implementing Dodd-Frank. Associate Directors at the SEC, Brian Bussey and Eric J. Pan, met ECMI members to discuss the release and the concept of substituted compliance.

Following the AIG case, the SEC is concerned that risks originated abroad may fall back on US taxpayers. Under the proposed rules therefore, any operations by subsidiaries guaranteed by a US firm would need to comply with Dodd-Frank. To avoid the accumulation of local requirements however, the SEC poses to apply an outcomes-based comparison of compliance with US and local rules - so-called substituted compliance.

From a transatlantic perspective, the SEC understands that US and EU rules tend to achieve similar outcomes, but the ‘equivalence’ approach proposed by the EU may prove more invasive than expected, which would push third countries to harmonise standards around the European regulatory framework. The SEC also welcomed the recent push by G20 leaders to explore the development of a global database for derivative transactions.