In Defense of the Dealers: Why the SEC Should Allow Substituted Compliance with the European Union for Security-Based Swap Dealers

To prevent some of the causes of the 2008-09 financial crisis, legislators around the world enacted laws that regulated the markets for over-the-counter (OTC) derivatives for the first time. These laws, though necessary, have duplicative requirements that dampen market efficiency. In the United States, the Securities and Exchange Commission (SEC) is contemplating a “substituted compliance” regime with other jurisdictions that would allow industry participants to comply with only one jurisdiction’s requirements for certain transactions. This Note argues that the SEC should allow substituted compliance for OTC derivatives, but only for dealers transacting with European partners. Some advocate for substituted compliance in a broad sense. These arguments, however, overlook nuances of the SEC’s announced approach. Others argue that the SEC should avoid the concept altogether. Ultimately, if the SEC allows substituted compliance narrowly and thoughtfully, it could preserve the economic benefits of an American financial market, while preventing some causes of the most recent financial crisis.