In Defense of the Dealers: Why the SEC Should Allow Substituted Compliance with the European Union for Security-Based Swap Dealers
By John Welling
Following the 2008–2009 financial crisis, legislators around the world enacted laws that regulated the over-the-counter (OTC) derivatives markets for the first time. These laws, though necessary, have duplicative requirements that dampen market efficiency. In the United States, the Securities and Exchange Commission is contemplating a “substituted compliance” regime with other jurisdictions. This regime would allow market participants to comply with one jurisdiction’s requirements for certain transactions, rather than the requirements of multiple jurisdictions. This Note argues that the SEC should allow substituted compliance for OTC derivatives, but only for dealers located in the United States and European Union. Some advocate for a broader substituted compliance regime. These arguments, however, overlook nuances of the SEC’s announced approach. Others argue that the SEC should avoid substituted compliance altogether. Ultimately, if the SEC allows substituted compliance narrowly and thoughtfully, it could preserve the economic benefits of a domestic financial market, while preventing some causes of the recent financial crisis.