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Felix Shipkevich March 25, 2013

The SEC’s Chairman Elisse Walter urged for a plan that would largely rely on foreign regulation for cross-border trades — ones that would only apply to U.S. rules in cases where no comparable regulations existed.

Chairman Walter spoke via a video conference at the Australian Securities and Investment Commission’s annual forum. Walter stated to Reuters:

In my view, that happy medium has its foundation in an approach that recognizes comparable foreign regulation to the maximum extent possible, consistent with domestic policy goals…This approach would permit a market participant to comply with a set of domestic requirements in a particular arena — capital or risk management, say — by complying with the comparable foreign regulation…At the same time, the domestic regulator would continue to have the ability to apply certain key policy requirements of local law when foreign law does not impose comparable requirements.

The CFTC’s head, Gary Gensler, has differing views than Chairman Walter, regarding reliance on foreign swaps rules. While both agencies have authority to police the over-the-counter market, the CFTC has largely been ahead of the SEC on many of its rules. The CFTC’s aggressive proposal for how to apply U.S. derivatives rules abroad has incited strong criticism from foreign regulators. The CFTC’s proposal would require foreign banks to stick to the same rules as their U.S. peers when dealing with a U.S. person, which includes companies, if their swap trading volume exceeds $8 billion a year.

Many foreign regulators have noted that this would create duplicative regulations, and have recommended that U.S. regulators adopt a framework that would allow banks to rely on rules imposed in each country. CFTC Chairman Gensler said his agency would accepted substituted compliance, but at a lesser degree than what SEC Chairman Walter has proposed.

The SEC continues to work on a nearly 1,000 page draft for how it will apply derivatives rules on cross-border transactions. Meanwhile, the agency is still waiting on confirmation of its next chairman, Mary Jo White. As of yet, it is unclear what view White will bring to the topic once she takes her position.

In the latest remarks, SEC Chairman Walter has hope that the U.S. will avoid two extreme options: by either being too broad in applying rules which would create “overlap and conflict,” or by relying too much on foreign regulation, which could potentially lead to regulatory shopping by the banks — creating a “race to the bottom.”

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