Scope

Extraterritoriality & Cross Border: Jurisdictional Challenge

Status: TO BE REVIEWED Last Updated: 14 Apr 2025

To share what we have learned thus far from all readings and meetings of both SEC and FINRA under 10c-1a and specifically the extraterritoriality / cross border aspect of this regulation.

The SEC OR FINRA are not responding to any further clarity requests from ISLA on this topic, each time the SEC or FINRA do reply they consistently refer back to the federal register page 75,689 attached in the 984 Final Rule FR Version.

The current understanding is that some firms believe they are in scope and some say they are not, both based on reading the very same rules.

We have boiled this down to the below:

1. Initially the extraterritoriality / cross border information came from the Federal Register page 75,689 – see below 984 final rule

2. In the FINRA proposed rules of 2^nd May 2024 there was hope that this would clarify the extraterritoriality / cross border aspect, unfortunately it didn’t it pointed again to the Federal Register page 75,689

3. As the FINRA proposed rule did not clarify the extraterritoriality / cross border it was advised to go to the SEC main document being the 353 page main document and read the below pages on extraterritoriality / cross border:

   1. Pages 161-168, 280, 285 (this is about the covered person so we know the covered person does not need to be located in the USA)

4. The below is important to understand – from ISLA working group meetings we have reached a point around interpretation where the debate is around there being two “Scoping criteria”

   1. In short this means out of three main criteria some firms believe only two of the three criteria need to be applied where other firms believe that all three need to be applied: see below

      1. Must be a Securities Loan – SFTR reportable security

      2. Security is reportable under CAT, TRACE or MSRB

      3. Must be effected, accepted, or facilitated in whole or in part in the USA

   2. Using the above criteria versus example 3 of the 12 examples (Extraterritoriality – Cross Border questions & scenarios v0.2 document below).

   3. So if you follow only criteria 1 and 2 then you could say you are definitely in scope for example 3, however

   4. If you followed criteria 1,2 and 3 above, based on example 3 you could argue what part of this loan was effected, accepted, or facilitated in whole or in part in the USA?

      1. Example 3:

         1. Non-US lender to Non-US borrower Interpretation: Out of scope because no party is agreeing, effecting, accepting, or facilitating the securities loan from within the US. Accordingly, the loan has been entirely agreed to outside of the US.

         2. See the word document attached also of all examples.

         3. Firms will need to decide their own scope due to the overall interpretation of the various regulatory text ambiguities.

5. Documents:

   1. Page 75,689 in the 984 Final Rule of the Federal Register:

      1. Page 75,689 in the 984 Final Rule of the Federal Register

   2. Original 9 flows ISLA sent to SEC for clarity on overall scope:

      1. Original 9 flows sent to the SEC for clarity on scope

      2. ISLA EMEA Extraterritoriality – Cross Border Letter to the SEC Final 20-12-2024:

         1. ISLA EMEA Extraterritoriality – Cross Border letter to the SEC Final 20.12.2024

   3. SEC Rule 10c-1a – 34-98737 (353 Pages):

      1. SEC Rule 10c-1a 34-98737 353 pages

      2. Pages 161-168, 280, 285 (this is about the covered person so we know the covered person does not need to be located in the USA)

   4. SEC Federal Register 8.12.2021 – 2021-25739 – 52 Pages:

      1. SEC Federal Register 8.12.2021 2021 25739 52 pages

   5. Extraterritoriality – Cross Border Questions and Scenarios v0.2:

      1. Extraterritoriality – Cross Border questions & scenarios v0.2

6. Examples of other regimes seeking SEC exemptive relief from the broad extraterritoriality scope:

   1. Example 1: Institute of International Bankers – US Treasury Clearing

      1. Please find this link: IIB Request for Treasury Mandate Relief a draft letter from IIB – seeking SEC exemptive relief from the Trade Submission Requirements for eligible secondary market transactions between a Non-U.S. Participant and its Non-U.S. Clients. This is a significant development, as it would help clarify the extra-territorial impact of the rule and allow us to better focus our implementation efforts.

      2. For reference:

         1. A Non-U.S. Participant refers to a direct participant of a U.S. Treasury securities covered clearing agency (CCA) that is not a U.S. person, a U.S. branch of a non-U.S. person, or a non-U.S. person whose obligations are guaranteed by a U.S. person.

         2. A Non-U.S. Client refers to a counterparty to a Non-U.S. Participant that is not a direct participant of a U.S. Treasury securities CCA, a U.S. person, a U.S. branch of a non-U.S. person, or a non-U.S. person whose obligations are guaranteed by a U.S. person. These definitions are aligned with the 1934 Act.

         3. The rationale for the relief echoes the arguments made during the request for an extension to the original compliance date, including:

            1. Lack of legal certainty around netting and close-out provisions across jurisdictions.

            2. Unclear regulatory implications for Non-U.S. Participants and their clients required to access or join CCAs.

            3. Increased operational and cost burdens that could negatively impact market liquidity and pricing.

            4. Potential disruption to SOFR rate stability, given its reliance on U.S. Treasury repo pricing.

   2. Example 2: CFTC – Security Based Swaps

      1. Federal Register 45292 – 45369

      2. See CFTC, Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 FR 45292, 45369 (July 26, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf. 

      3. The Commission similarly took the view that, for a transaction between non-U.S. persons where “the counterparty credit risk and operational risk of such transactions reside primarily outside the United States,” its mandatory security-based swap clearing requirement should not apply.

      4. See Exchange Act Release No. 74834 (Apr. 29, 2015), 80 FR 27444, 27481 (May 13, 2015).

Cross Border Application

Status: SEC APPROVED RULES 2.1.25 Last Updated: 14 Apr 2025

With respect to the cross-border application of Rule 10c-1a, the Commission stated that, section 10(c) of the Exchange Act, by its terms, requires reporting when, directly or indirectly, a person has “effect[ed], accept[ed], or facilitate[d]” a transaction involving the loan or borrowing of securities.

Based on that language, the Commission concluded in the Rule 10c-1a Adopting Release that the relevant domestic conduct that triggers the Commission’s regulatory authority under section 10(c) is conduct within the U.S. that comprises (in whole or in part) effecting, accepting, or facilitating of a borrowing or lending transaction.

The Commission further stated that, because Rule 10c-1a is intended to be co-extensive with the regulatory scope of section 10(c), it is of the view that Rule 10c-1a’s reporting requirements will generally be triggered whenever a covered person effects, accepts, or facilitates (in whole or in part) in the U.S. a lending or borrowing transaction.

Rule 10c-1a Adopting Release, 88 FR 75689.