SEC aims to loosen rules on foreign broker-dealers in U.S., official says

November 26, 2013

By Nick Paraskeva, for Compliance Complete

NEW YORK, Nov. 26 (Thomson Reuters Accelus) – U.S. securities regulators are looking to loosen rules for foreign-broker dealers acting in the U.S. on a cross-border basis. The change would come in the wake of new policy being adopted to implement derivatives cross-border rules under Dodd-Frank. The reform was outlined by John Ramsay, Acting Director, Division of Trading and Markets of the Securities and Exchange Commission (SEC).

Rulemaking priorities at the SEC division include the Volcker rule on proprietary trading, derivatives and a proposal for firms and exchanges to test major systems. New data sources and analytics will impact new rules on equity market structure and infrastructure improvements, Ramsay said on Tuesday at the Securities Industry and Financial Market Authority’s (SIFMA) Legal and Compliance Society.

Ramsay is optimistic about completion of the Volcker Rule, which is being actively discussed among five federal agencies. The result should heed requests for all regulators to agree the same set of rules, due to concerns of inconsistent treatments across markets. The final rule is expected to be more manageable for firms, and enable compliance procedures to be built in support of them.

The agency is moving to complete derivatives rulemaking for cross-border activity, including definition of a U.S. person and how affiliates are treated. They will then finalize rules on data repositories, reporting and dealer regulation. The agency will re-propose derivative margin rules after Basel’s recent standards. The SEC oversees a smaller share of derivatives than the Commodities Futures Trading Commission (CFTC).

“We have lagged behind in derivatives, and many CTFC rules are already in place, so the question is how much we align with them” said Ramsay. One viewpoint highlights the value of consistency, so firms do not need two sets of compliance procedures. In any event, the SEC needs to conclude that any policy choice they take makes sense, noting that some decisions taken by the CFTC “made more sense than others”.

SEC role growing in cross-border swaps

After rulemaking, Ramsay expects the SEC to play a bigger role than the CFTC overseeing cross-border derivatives. This is because the CFTC lacks the resources to monitor offshore swap dealers and are unlikely to be given funding to do this any time soon. The task in the U.S. will fall to the SEC with the Federal Reserve, in conjunction with overseas regulators and entities such as swap clearing houses.

The need for strong market infrastructure was highlighted by a continuing series of hiccups at exchanges which disrupted trading. SEC Chair Mary Jo White called on exchanges to issue short-term initiatives and their recent statement summarized progress, without giving detail. Ramsay said it must focus on core activities such as securities processors, and commit defined objectives and timeframes to hold people to complete.

The SEC’s proposed Reg SCI on testing systems provoked negative comments, said Ramsay, some of which were drafted before the recent market problems. “We are looking at the comments seriously, and think we can refocus the rule and still archive our objective” he added. The SEC has become more active in enforcement actions against exchanges that do not meet minimum standards and this will continue.

More access for foreign-broker dealers

The division wants increased access for foreign broker dealers by revising Rule 15a-6 under the Securities Exchange Act, Ramsay said. The rule exempts a foreign broker-dealer from registering with SEC if it has limited activities with U.S. investors. These include unsolicited securities transactions, providing research, and soliciting transactions with U.S. institutional investors if they use a “chaperoning” U.S. broker-dealer.

“Rule 15a-6 has gotten long-in-the-tooth” said Ramsay and doesn’t work well facilitating offshore entities and U.S. investors. The revision for foreign firms was triggered by swaps rules that take a new approach. One route is to provide a limited registration regime for a class of foreign firms who only want to deal with a certain class of institutions. This moves away from the current binary choice of full or no registration.

Ramsay said on the sidelines that a new rule will likely be open to all jurisdictions, and not limited to those with equivalent regulation. This would be distinct from substituted compliance determinations that SEC and CFTC will make on specific nations with the aim of disapplying rules to firms regulated by them. The SEC has a longer timeframe than CFTC to finish determinations, and do not have a year-end target.

Market analysis

Ramsay discussed the SEC’s new market structure data and analysis website, which takes feeds from all U.S. markets including orders, trades and cancelations. It allows SEC data mining and to construct a view of the market they have not had before, “Sophisticated parties have had access to this information for some, time” said Ramsay, “the great thing about it is we can provide views of data to the market at large”.

The data will be helpful in periods after a market disruption to quickly reconstruct the causes, and when questions are raised on dark trading, or whether a high proportion of activity is made up of high frequency trading. “We can really use this data to help drive regulatory policy choices in a way that is smarter and more defensible” Ramsay added, given the new cost-benefit-analysis now being applied to rulemaking.

The market data system allows separate views for corporate equity and exchange-traded-products. Odd-lot trades will soon be reported to the tape, and there has been speculation that people had used odd lots to avoid reporting to the tape. “When the new requirements go into effect, if the reported odd-lot numbers go right down, that might tell us something about market behavior” said Ramsay.

SEC used new data in a report on the speed of equity markets, after speculation that many trades put into the market for a short time were not intended to be executed. Based on findings, the SEC has not defined a minimum latency period to address this concern. Another staff report covered market fragmentation and market quality to detect portions of dark trading and whether this is a cause of fragmentation.

The bulk of surveillance work is done by self-regulatory organizations, “and we are not interested in duplicating it,” Ramsay said. “It is important for the SEC to be able to conduct targeted surveillance. I would like to expand the ability to do targeted surveillance to look at the cause of a particular event. The SEC can use analytics to quickly reconstruct order books for a specific time period.

(Nick Paraskeva is principal of Reg-Room LLC (, which provides regulatory information and consultancy. He covers various facets of the banking and securities industry and delivers exclusive analysis through Thomson Reuters. He can be contacted at (212) 217-0403 and Follow Nick on Twitter@regroom. )

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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