On June 25, 2014, the SEC adopted the final rules implementing the Dodd-Frank Act, Title VII, regarding the application of Security-Based Swap Dealer and Major Security-Based Swap Participant to Cross-Border Security-Based Swap Activities. This is Part II of a three (3) part series on these new rules under the Securities Exchange Act.
Application of the Aggregation Principles to Cross-Border Dealing Activity
The final rule provides that if a person engages in dealing transactions counted against the de minimis thresholds, the person also must count all dealing transactions in which any U.S. person controlling, controlled by, or under common control with the person engages, including transactions conducted through a foreign branch. In addition, the person should count all dealing transactions of its conduit affiliates. Finally, the person must count all dealing transactions of non-U.S. person affiliates that: (a) are entered into with U.S. persons other than the foreign branches of registered dealers; or (b) constitute dealing activity subject to a guarantee giving the non-U.S. person’s counterparty rights of recourse against a U.S. person affiliated with the non-U.S. person.
The release stated that the intent of these requirements is to prevent evasion of the dealer registration requirements by persons that otherwise may seek to avoid dealer registration by simply dividing up dealing activity in excess of these thresholds among multiple affiliates. Further, in keeping with that purpose, in the cross-border context it is appropriate to require a person’s affiliates to count the same dealing transactions that the person itself would be required to count for purposes of the de minimis requirements. However, an exception was issued which provides that a person need not count against the de minmis thresholds of the security-based swap transactions of an affiliate that either is registered with the SEC as a dealer; or deemed not to be a dealer pursuant to regulations.
Exception for Cleared Anonymous Transactions
The final rule provides that certain security-based swap transactions that a non-U.S. person enters into anonymously on an execution facility or national securities exchange and that are cleared through a clearing agency do not have to be counted against the de minimis thresholds.
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