Foreign security-based swap dealers (SBSDs) and major security-based swap participants (SBSPs) may satisfy specified U.S. rules by complying with comparable home-country requirements—but only if the SEC has issued an order expressly allowing it. But substituted compliance does not mean free pass.
Because many conditions are cross-referenced (e.g., capital, recordkeeping, and reporting), a single breach of a substituted foreign requirement can simultaneously violate multiple Exchange Act provisions—and instantly revoke the ability to rely on substituted compliance.
Why It Matters Now
Cross-border SBS activity—and especially digital-asset trading—continues to surge; registered SBS entities already rely on SEC substituted-compliance orders, and more are expected to follow.
Regulatory Climate: Scrutiny Is Rising
- The SEC’s Division of Examinations flagged substituted compliance as a 2025 priority.
- The Enforcement Division brought its first stand-alone substituted-compliance case in August 2025, signaling zero tolerance for lapses.
- The CFTC has adopted parallel procedures but pledges greater deference to foreign regulators, in contrast to the SEC’s hands-on approach.
Key Compliance Imperatives
- Master every condition in the SEC order—no exceptions.
- Treat foreign rules as if they were U.S. law; noncompliance abroad equals a U.S. violation.
- Maintain ironclad records ready for on-the-spot production during SEC exams.
- Keep open, proactive lines of communication with both U.S. and home regulators.
Practical Tips for In-House and Outside Counsel
- Run periodic gap analyses comparing U.S. and foreign requirements.
- Stress-test controls surrounding capital calculations, margin, and record retention.
- Document remediation of any foreign regulator findings before the SEC comes knocking.
The bottom line is that substituted compliance streamlines cross-border SBS operations but invites heightened oversight. Firms that rigorously police their dual obligations will preserve the benefits of this opportunity.
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