SEC Establishes New Supervisory Cooperation Arrangements With Foreign Counterparts

The Securities and Exchange Commission (SEC) announced that it has established comprehensive arrangements with the Cayman Islands Monetary Authority (CIMA) and the European Securities and Markets Authority (ESMA) as part of long-term strategy to improve the oversight of regulated entities that operate across national borders. 

The two memoranda of understanding (MOUs) reached this month follow on a similar supervisory arrangement that the SEC concluded with the Quebec Autorité des marchés financiers and the Ontario Securities Commission in 2010 and expanded to include the Alberta Securities Commission and the British Columbia Securities Commission last September. 

The SEC’s latest supervisory cooperation arrangements will enhance SEC staff ability to share information about such regulated entities as investment advisers, investment fund managers, broker-dealers, and credit rating agencies. The Cayman Islands is a major offshore financial center and home to large numbers of hedge funds, investment advisers and investment managers that frequently access the U.S. market. ESMA is a pan-European Union agency that regulates credit rating agencies and fosters regulatory convergence among European Union securities regulators.

“Supervisory cooperation arrangements help the SEC build closer relationships with its counterparts to cooperate and consult on each other’s oversight activities in ways that may help prevent fraud in the long term or lessen the chances of future financial crises,” said Ethiopis Tafara, Director of the SEC’s Office of International Affairs.

The SEC’s approach to supervisory cooperation with its overseas counterparts follows on more than two decades of experience with cross-border cooperation, starting in the late 1980s with MOUs facilitating the sharing of information between the SEC and other securities regulators in securities enforcement matters. The SEC’s enforcement cooperation arrangements – which now encompass partnerships with approximately 80 separate jurisdictions via bilateral MOUs and a Multilateral MOU under the auspices of the International Organization of Securities Commissions (IOSCO) – detail procedures and mechanisms by which the SEC and its counterparts can collect and share investigatory information where there are suspicions of a violation of either jurisdiction’s securities laws, and after a potential problem has arisen.

In contrast, the SEC’s supervisory cooperation arrangements generally establish mechanisms for continuous and ongoing consultation, cooperation and the exchange of supervisory information related to the oversight of globally active firms and markets. Such information may include routine supervisory information as well as the types of information regulators need to monitor risk concentrations, identify emerging systemic risks, and better understand a globally-active regulated entity’s compliance culture. These MOUs also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located abroad. 

Although they are designed to achieve different things, enforcement and supervisory cooperation arrangements are complimentary tools. Supervisory cooperation involves ongoing sharing of information regarding day-to-day oversight of regulated entities. Enforcement cooperation MOUs, by contrast, help the Commission collect information abroad that is necessary to help ensure that the SEC’s enforcement program deters violations of the federal securities laws, while also helping to compensate victims of securities fraud when possible.

The SEC entered into its first supervisory cooperation MOU in March 2006 with the United Kingdom’s Financial Services Authority. Following the recent financial crisis, the Commission has expanded its emphasis on this form of continuous supervisory cooperation in an effort to better identify emerging risks to U.S. capital markets and the international financial system. As part of this effort, SEC commissioners and staff co-chaired an international task force in 2010 to develop principles for cross-border supervisory cooperation. These principles have since proven to be a useful guideline for structuring MOUs around the type of information to be shared, the mechanisms which regulators can use to share information, and the degree of confidentiality this information should be accorded. 

Additional information about SEC cooperation arrangements with foreign regulators can be found at: http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml. (Press Rel. 2012-49)

SEC Issued Joint Report on International Swap Regulation

Securities and Exchange Commission (SEC), capital market regulator of United States issued "Joint Report on International Swap Regulation" in line of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC has quoted in the report that effectively regulated financial markets are a necessary component of a strong economy. When the financial system failed three years ago, over-the-counter (“OTC”) derivatives were unregulated, and financial systems and participants were interconnected to a greater extent than ever before. The global nature of OTC derivatives requires comprehensive international cooperation and coordination.

Efforts to regulate OTC derivatives are under way in the United States and abroad. The financial crisis of 2008 has led to broad international consensus on the need for improved transparency, mitigation of systemic risk, and protection against market abuse, and extraordinary coordination on how best to achieve sound regulation appropriately tailored to the OTC derivatives market.

Jurisdictions with major OTC derivatives markets have taken steps toward regulating OTC derivatives – with variance in pace, but with consistency among many of the ultimate policy goals. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) provides the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC” and, together with the CFTC, the “Commissions”) with the authority to regulate certain types of derivatives that currently are entered into bilaterally and that typically are not cleared. Subject to certain exceptions, Title VII of the DFA (“Title VII”) requires the CFTC to regulate those derivatives defined as swaps, and requires the SEC to regulate derivatives defined as security-based swaps. The Commissions are in the midst of promulgating regulations to implement this statutory mandate.

DFA Section 719(c) requires the Commissions jointly to conduct a study (“Study”) and then to report to Congress (“Report”) on how swaps and security-based swaps (collectively “Swaps”, unless otherwise indicated) are regulated in the United States, Asia, and Europe and to identify areas of regulation that are similar and other areas of regulation that could be harmonized. Section 719(c) also calls for the Report to identify major dealers, exchanges, clearinghouses, clearing members, and regulators in each geographic area and to list the major contracts (including trading volumes, clearing volumes, and notional values), the methods for clearing swaps, and the systems used for setting margin in each geographic area.

The Study is one facet of the CFTC’s and the SEC’s work in analyzing the international context and implications of the DFA. Congress directed the Commissions (and prudential regulators) in Section 752(a) of the legislation to “as appropriate . . . consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation … of swaps, security-based swaps, swap entities, and security-based swap entities” in order to “promote effective and consistent global regulation of swaps and security-based swaps”.

This Report includes four sections. Section I discusses the Congressional mandate for the Study and Report, including the process and approach used by CFTC and SEC staff. Section II describes the regulatory framework for OTC derivatives in the Americas, European Union, and Asia, and Section III analyzes the similarities and differences across jurisdictions, discusses potential areas for harmonization, and makes recommendations for next steps.10 Finally, Section IV provides the conclusion of the Study and Report.