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SEC Approves Rules on Over-the-Counter Derivatives

Approved by unanimous vote, the U.S. Securities and Exchange Commission (“SEC”) will adopt rules on how to apply “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” definitions to cross-border security-based swap actions under the Securities Exchange Act of 1934 and Title VII of the Dodd-Frank Act. The new rules are part of a bigger framework suggested under the Dodd-Frank Act that would control over-the-counter derivatives. Through the Dodd-Frank Act, the SEC can carry out a regulatory framework for security-based swaps. At this time, security-based swaps trade solely in over-the-counter markets with little oversight. To counter future financial crises, various SEC commissioners had advised completing a framework to watch over such derivatives.

Per the SEC’s rule, select foreign banks that handle derivatives are subject to new U.S. rules. Transactions completed by the foreign divisions of banks must comply with U.S. rules if the parent company legally guarantees affiliates’ trades with recourse. In addition, the rule details the SEC’s anti-fraud powers and process banks are obliged to follow for meeting the rules of a foreign regulator.

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