Dodd Frank financial regulation overview

The Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) came into force on 21 July 2010. It made changes to the United States financial regulatory environment and has wide cross-border impacts to the global financial services industry.

Introduction to Dodd-Frank Derivative Market Reform

Dodd Frank was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system in line with G20 commitments to reform and improve the OTC derivatives market structure. Dodd Frank divided regulatory authority over OTC derivatives between the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC).

  • The SEC regulates Security-Based Swaps (SBS) and Security-Based Swap Dealers (SBSD).
  • The CFTC regulates Swaps and Swap Dealers (SD).
  • The CFTC and SEC jointly regulate mixed swaps.

The SEC Security-Based Swaps requirements take effect from 06 August 2021. As a result, HSBC Bank plc and HSBC Bank USA, N.A. are registering as SBSDs, no later than 01 November 2021.

HSBC entities other than HSBC Bank plc and HSBC Bank USA, NA will no longer be able to trade SBS with in-scope counterparties from 06 August 2021.

For more information on the SEC SBS Regulatory Regime, can be found in the HSBC SBS FAQs (PDF, 2MB).

If you have questions regarding how the SEC SBS Regulatory Regime applies specifically to your relationship with HSBC, please contact your HSBC Relationship Manager.

Both HSBC Bank plc and HSBC Bank USA N.A. are registered CFTC Swap Dealers.

Cross-Border Application

Both the SEC and CFTC obligations have a global impact on the financial services market place, with impact to both US and non-US financial institutions. For US financial institutions, such as HSBC Bank USA N.A., the rules apply to all SBS or swap transactions (subject to exemptions). For non-US financial institutions, such as HSBC Bank plc, the applicability of the requirements varies based on the facts and circumstances of the counterparty and transactional nexus to the United States. Therefore, it is critical for dealers to understand their counterparties/clients and whether each is considered within the scope of either the SEC or CFTC regulatory requirements. HSBC refers to this as the “US Person” status of our counterparties/clients.

The SEC’s business conduct rules for SBSDs entering into SBS have a different extra-territorial scope of application compared to equivalent CFTC rules for swaps. In particular, the SEC’s business conduct rules will apply to HSBC Bank plc (a non-US SBSD) facing a non-US client where we use US-based personnel to arrange, negotiate or execute the trade (“ANE”). The presence of so-called “ANE” could be different from trade to trade, and so the application of rules may depend not just on the legal status of the parties, but on how we trade, or in future might want to trade. For example, ANE might be present where a non-US client wants to trade with HSBC Bank plc outside the local trading day but during US business hours.

If, as a result of ANE, the SEC business conduct rules apply to a transaction, we may require you to put documentation in place with HSBC Bank plc in order to avoid potential trading disruptions.

US Person

On 13 November 2020 the CFTC’s Final Cross-Border rules came into effect, which amongst other things, aligned the CFTC definition of what constitutes a “US Person” with those of the SEC for SD and SBSD rules respectively.

Subject to certain exceptions, a US Person is any of the following for both CFTC and SEC purposes:

  • A natural person resident in the United States
  • A partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States
  • An account (whether discretionary or non-discretionary) of a US Person
  • An estate of a decedent who was a resident of the United States at the time of death.

Both the CFTC and SEC have developed concepts to determine which Dodd-Frank obligations apply when transacting Swaps and Security-Based Swaps with foreign branches of US Persons and US Branches of Non-US Persons.

Additionally, the CFTC has introduced the concepts of a “Guaranteed Entity” and a “Significant Risk Subsidiary” for the purposes of determining which Swap transactions count towards the threshold above which they must register as a Swap Dealer or Major Swap Participant (the “de minimis threshold”).

HSBC will request this information of Swap and Security-Based Swap counterparties of HSBC Bank plc and HSBC Bank USA N.A. The International Swaps and Derivatives Association, Inc. (ISDA) U.S. Self-Disclosure Letter (SDL) published by ISDA on 15 January 2021, is intended to assist market participants with the exchange of information necessary to comply with CFTC, Prudential Regulator, and SEC SBS regulations, as applicable. For more information please see HSBC SBS FAQs (PDF, 2MB).

Business Conduct Standards

The Dodd Frank External Business Conduct rules have been designed to protect customers throughout the transaction life cycle. In particular, they are intended to educate the customer on trade risks through the delivery of important pre-trade information, for example, material risks, conflicts disclosures and trade characteristics. In addition, they provide protection to customers from fraudulent, deceptive and manipulative practices.

In a similar fashion to the CFTC Regime, a number of SEC regulatory requirements will in practice be satisfied by updates to existing client relationship documentation, typically through adherence to one or more ISDA Protocols, or in some cases through entering into bilateral equivalent agreements.

Improving ‘Know-Your-Customer’ and Trading Procedures

In order to trade derivatives products, HSBC must adhere to high-level Know Your Customer (KYC) standards and uphold strict rules for trading relationship documentation, the timely confirmation of trades and the reconciliation of portfolios.

HSBC has adopted a proactive approach to financial regulation compliance and KYC observance.

Find out more about Dodd-Frank

Need help?

For more information, please contact your HSBC representative.