SOCIETE CENERALE

Corporate 8 Investment Banking

Laura J. Schisgall

Managing Director and Senior Counsel

Main Tel. 212 278 5656

Fax. 212 278 2074

laura. schisgallOsgcib. corn

November 23, 2010

Ananda Radhakrishnan

Director, Division of Clearing and Intermediary Oversight

U.S. Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, D.C. 20581

John M. Ramsay

Deputy Director, Division of Trading and Markets

U.S. Securities and Exchange Commission

100 F Street, NE

Washington, D.C. 20549

Mark E. Van Der Weide,

Senior Associate Director, Division of Supervision and Regulation

Board of Governors of the Federal Reserve System

2000 L Street, NW

Washington, D.C. 20006

Dear Messrs. Radhakirshnan, Ramsay and Van Der Weide:

Introduction

Societe Generale ("SG")greatly appreciated the opportunity to meet with the Commodity

Futures Trading Commission ("CFTC"),the Securities and Exchange Commission ("SEC" and, together

with the CFTC, the "Commissions" )

and the Federal Reserve Board staff on November 15, 2010. We

thank all the staff who met with us for their time and attention during this busy period. As requested,

this letter is a follow-up to our meetings and puts some of our concerns and proposals in writing in the

hope that will help in your consideration of them.

Societe Generale

1221 Avenue of the Americas

New York, NY 10020
As we discussed, SG, like many foreign banks, has a significant concern as to how to comply with

Title Vll of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") due to the high

risk of overlapping U.S. and home country derivatives regulation and the long lead time needed for

complex operational and systems changes necessary for implementation. SG, and other banks based in

the European Union ("EU"), will soon be required to comply with the European Market Infrastructure

Regulation ("EMIR" ), the EU's derivatives legislation. We expect EMIR to be largely similar to Title Vll of

the Act, but there will be differences in important details. SG and other foreign banks will have

difficulties in implementing both sets of rules without further guidance from the relevant regulators.

SG's derivatives business is operated and managed globally and is relatively small in the United

States in comparison to its total scope. There is no guidance in the Act as to how to apply Title Vll to a

global business. SG and, we believe, other foreign banks need to find solutions that will allow us to

continue to function globally and implement Title Vll locally.

As we discussed in our meetings, we seek clarity on three key implementation issues concerning

the Act. We believe these issues affect not only SG but also affect other foreign banks with substantial

Swaps' operations in the United States. For SG and many foreign banks, clarity on these key issues is a

critical and challenging ~reliminar requirement to operational planning for the implementation of Title

Vll. These key issues are: (i) definition of Swap Dealer' in a manner that is consistent with the policies of

the Act as well as with foreign bank regulation, (ii) clarification of the extent of the extra-territorial reach

of Title Vll, and (iii) certainty on how the capital and margin provisions of Title Vll will be applied to

foreign banks. '

Finally, the global nature of the derivatives business poses challenging questions related to

regulatory coordination and harmonization. We believe that considerations of international comity as

well as the public policy goals of derivatives regulation on both sides of the Atlantic should lead the U.S.

and EU regulators to determine that they can limit their jurisdiction to the part of the Swaps business

that they can most practically regulate —even if they have jurisdiction over a broader range of the

Swaps business. In this letter, we set forth our ideas on how such jurisdictionallimits might be

established.

In this letter, "Swaps" refers also to Security-based Swaps unless otherwise noted, and both terms shall have the

meaning set forth in the Act.

In this letter, "Swap Dealer" refers also to Security-based Swap Dealer unless otherwise noted, and both terms

shall have the meaning set forth in the Act.

We raised other important issues in our meetings, including concern about the drafting in Section 716 of the Act,

technical interpretation issues with respect to Regulation Y and concerns about the structure of future commission

merchants. These remain important issues that need to be resolved to achieve complete implementation of the

Act, but we are focusing this letter on the most critical issues at this time.
Def' ition f a Deal r

Forei n Bank Bookin Structures

Many foreign banks, including SG, conduct, consolidate and book their Swaps business in a nonU.S. domiciled entity. Such a consolidated booking structure means that, regardless of where a Swap is

sold and regardless of the client to whom a Swap is sold, all Swaps are booked in the same legal entity,

which is most typically a foreign regulated bank. Although there is no one standard foreign bank

booking structure, this global consolidated structure is typical for many foreign banks. All these banks

will have difficulty implementing Title Vll because it has not been drafted to take into account the

realities and complexities of a global business.

There are significant advantages to both the foreign bank and its clients in having one main legal

entity for Swaps booking. In the case of SG, these advantages include:

(i) Clients can enter into their Swap transactions with SG, which is the best

capitalized and most highly rated entity in the SG group;

(ii) Clients can enter into Swap transactions with a substantial deposit-taking bank

and not a separately organized special purpose derivatives dealer that has few

assets other than its derivatives book;

(iii) Both SG and its clients can globally manage credit risk through netting and setoff arrangements, which provide significant protection for both parties in the

event of the other party's default;

(iv) SG can most efficiently manage its market risk, trading models, documentation,

operations and systems, and these efficiencies decrease risk; and

(v) There is increased transparency to regulators with regard to a bank's Swaps

business,

Overall, the advantages of carrying out Swaps transactions in and with a foreign bank with a

consolidated booking structure help control risk significantly. Such booking also advances the policy

goals of reducing risk and providing greater transparency in the financial system, We believe it would be

sensible for the Commissions to craft regulations that do not discourage foreign banks such as SG from

registering as Swap Dealers.

In considering how to comply with Title Vll, foreign bank derivatives dealers must initially

determine which legal entity will register as a Swap Dealer. We believe that, as a policy matter, the

Commissions should adopt rules that are flexible and responsive to the unique situation of foreign

banks, and that recognize different types of Swap Dealers. Registrants should be permitted to choose

the registration option that works best for their business while meeting the regulatory goals of Title Vll.
One Re istration Model: "Forei n Swa Dealer" and "Non-Bookin Swa Dealer"

SG prefers to continue to book Swaps in the deposit-taking, principal SG entity located in Paris

("SG Paris" )." We understand that registering SG Paris as a Swap Dealer might create practical concerns

for the Commissions as it initially may seem more difficult to regulate and examine a foreign entity than

a U.S. entity. Registering SG Paris could also be a concern for SG's French regulators who would not

accept unlimited exercise of the Commissions' jurisdiction in France, especially over businesses not

covered by the Act. To address these issues, we propose that SG Paris register with the Commissions as

a foreign Swap Dealer (a "Forei n Swa Dealer" ), which would be defined by the Commissions in their

rulemaking. The Foreign Swap Dealer would be permitted to fulfill most of its Title Vll obligations

through an affiliated U.S.-domiciled Swap Dealer (a "Non-Bookin Swa Dealer" ), which would also be

registered with the Commissions. '

The Non-Booking Swap Dealer could be a registered broker-dealer

("BD")'

and might also become a registered futures commission merchant ("FCM"). The Non-Booking

Swap Dealer would be legally obligated, as set forth in the definitions promulgated by the Commissions,

to fulfill specific duties on behalf of the Foreign Swap Dealer. '

Both the Foreign Swap Dealer and the

Non-Booking Swap Dealer would be regulated by the Commissions.

We believe that most of the duties of a Swap Dealer as set forth in Title Vll could be performed

by a Non-Booking Swap Dealer acting on behalf of a Foreign Swap Dealer, either because they are

already performed outside of the entity in which Swaps are booked or because systems and procedures

could be built to perform such activities outside of the booking entity. '

The only duties that would be

We have assumed that individual branches of any bank might register as a Swap Dealer without the entire bank

becoming a Swap Dealer. This is reasonable as this is how the derivatives business is currently structured; multibranch entities only deal and/or book derivatives from certain branches and only those branches have obligations

to clients.

This proposal assumes that the jurisdictional scope of Title Vll will be clarified and appropriately limited. This

topic is discussed in this letter under the heading "Clarification of the Extent of th Extra-territorial Reach of Title

Vll "infra.

We have assumed that most Non-Booking Swap Dealers would need to be a BD if they intend to act as agent in

Security-based Swap transactions, but this is not essential for our proposed structure.

To be clear, we are not suggesting that a foreign bank be allowed to register as a Foreign Swap Dealer without

also having a U.S.-domiciled affiliated Non-Booking Swap Dealer. Rather, the Non-Booking Swap Dealer would be a

necessary feature for a foreign booking entity to register as a Foreign Swap Dealer.

The general Title Vll duties of a Swap Dealer are:

~ submitting all Swaps that are required to be cleared to a clearinghouse and traded on a board of trade

designated as a contract market or a securities or exchange or through a swap execution facility;

~ reporting Swaps to a Swap data repository;

~ real-time reporting of Swap data;
required to be performed by the Foreign Swap Dealer are complying with the clearing and trade

execution requirements and booking and holding capital for Swaps. Because these duties are limited,

the Commissions should be able to examine them, even though they are performed by a foreign bank,

without encroaching on foreign regulators' jurisdiction —provided that the Swaps under the

Commissions' jurisdiction are clearly defined.

Our views are supported by Section 721(a)(49) of the Act, which defines a Swap Dealer as a:

person who (i) holdsitself out as a dealer in swaps; (ii) makes a marketin swaps; (iii) regularly

enters into swaps with counterparties as an ordinary course of business for its own account; or

(iv) engages in any activity causing the person to be commonly known in the trade as a dealer or

market maker in swaps.

Section 721(a)(43) contains a wholly parallel definition of Security-based Swap Dealer.

Currently, even though SG books most of its Swaps in SG Paris, many of the SG personnel who

do the actual dealing work with regard to SG's U.S. business are located in New York and are employees

of either SG Americas Securities, LLC ("SGAS"), SG's New York-based broker-dealer, or SG's New York

bank branch. It is these U.S. employees who hold themselves out as dealing in Swaps and who are

responsible for booking Swaps into SG Paris (through an internal delegation of authority). A client

typically contacts these employees to buy or sell a Swap. These employees provide pricing for Swap

transactions and generally engage in activity commonly known in the trade as dealing in Swaps. We

propose to centralize these employees in our BD and to register the BD as a Non-Booking Swap Dealer.

~ holding capital for Swaps;

~ collecting margin for Swaps;

~ protecting client margin in segregated accounts, third-party custodians or by the delivery to a

clearinghouse;

~ enforcing the general business conduct rules and those aimed specifically at "special entities";

~ complying with documentation standards;

~ maintaining a full compliance regime with respect to Swaps, including trade monitoring, risk

management, information disclosure to regulators and conflicts of interest systems;

~ recordkeeping and reporting;

~ maintaining daily trading records;

~ designating a chief compliance officer; and

~ determining the type of Swap (mixed, cleared or uncleared) and counterparty (major swap participant,

Swap Dealer, "end user" or non-eligible contract participant) and treating each Swap and counterparty in

accordance with the Commissions' regulations with respect to that type of Swap.
Through their regulatory authority over the BD, the Commissions will be able to examine for compliance

with virtually all of the general duties of a Swap Dealer. '

In contrast, SG Paris employees do not generally (i) hold themselves out to U.S. customers as a

dealer in swaps in the United States, (ii) make a market in Swaps in the United States, or (iii) engage in

activity in the United States that would cause them to be commonly known in the trade as a dealer or

market maker in swaps. While we would propose to register SG Paris as a Foreign Swap Dealer, our

proposal is based on the assumption that the Non-Booking Swap Dealer would be recognized by the

Commissions as the responsible party for the majority of the Foreign Swap Dealer's obligations. The

Commissions would be entitled to examine SG Paris for compliance with the clearing, trade execution

and capital rules. The Non-Booking Swap Dealer would facilitate this examination by making all

necessary information available directly to the Commissions.

"

We recognize that Title Vll does not provide the Commissions with authority to exempt Swap

Dealers from registration. Our proposal, therefore, does not envision the Commissions granting any

exemption similar to a Part 30 exemption or Rule 15a-6 exemption. SG Paris would be a registered

Foreign Swap Dealer under Title Vll but would fulfill most of its duties through the Non-Booking

Registered Swap Dealer. We believe Title Vll provides the Commissions with sufficient discretion and

authority to establish through their rulemaking different types and categories of Swap Dealers, so long

as the actual Swap dealing activity is regulated in accordance with the Act.

Alternatives to and Conse uences of a Ri id Definition of Swa Dealer

One alternative to our proposed definitions of a Non-Booking Swap Dealer and a Foreign Swap

Dealer would be to register only SG Paris as a Swap Dealer. We would consider this alternative if we

could understand how the Commissions would regulate and examine SG Paris. We believe that French

regulators would want to understand the scope of the Commissions' exercise of jurisdiction in France

before agreeing to this alternative.

Another alternative would be for SG to divide its derivatives business and put the "U.S."

portion

into a separate legal entity that would register as a Swap Dealer (a "Newco").

"

Creation of a Newco

could, paradoxically, create rather than reduce risk and decrease transparency. For clients, there could

be more risk because a Newco would be a less well-capitalized entity than SG Paris. The Newco could

' We have assumed that the Commissions will have full examination powers with respect to employees and agents

of a Non-Booking Swap Dealer.

' We do not expect there to be any issues with the French "blocking statute" because the information required by

the Commissions will be readily available to the U.S.-domiciled, New York-based Non-Booking Swap Dealer.

In order to risk manage the Newco, SG might choose to mirror all of its transactions back to SG Paris, which

could decrease transparency.
also create more risk for SG because it would fractionalize global risk management of the firm's

derivative business, siphon capital from the home country derivatives dealer, and complicate the

calculation of capital, thus making it difficult for either home-country prudential or U.S. regulators to

assess capital. For both clients and SG, there could be more risk and uncertainty because neither would

easily be able to net Swap transactions in the event of the other's default or insolvency. For regulators,

there could be less transparency since there would be fewer incentives and policy reasons for foreign

regulators to share information with U.S. regulators as the U.S. and non-U. S. Swap Dealers would be

acting independently from one another. We believe that the Commissions should write regulations that

mitigate rather than augment systemic risk and create global transparency rather than obscure it.

Another alternative would be to use a BD/FCM as the registered Swap Dealer. The capital

complications related to using such an entity to book Swaps are severe. BDs and FCMs each have

different capital regimes that are not conducive to Swaps booking. SG Paris will be governed by the

more restrictive Basel III standards, which we estimate will require SG to hold several billion dollars in

additional capital against its Swaps business. How this capital would be allocated and reconciled in the

BD/FCM booking entity is unclear.

"

Even if the capital implications could be resolved, implementing the migration of the U.S. Swaps

business from SG Paris to either a Newco or a BD/FCM would be operationally difficult, expensive and

challenging in the time frame allotted by the Act for Swap Dealer registration. In addition, either model

would require a massive re-papering of each of the bank's client relationships because trading in

derivatives is rarely done without signed master agreements. Engaging in re-papering for thousands of

clients would be lengthy, would require significant additional staff (and thus be costly) and could not be

done before the requirements of Title Vll and its implementing regulations are effective. The outcome

would be that banks would be restricted in the number of clients with which they can trade for a

substantial period of time, resulting in decreased competition and less overall market liquidity.

A third alternative would be for foreign banks to withdraw from the U.S. Swaps market entirely.

Writing regulations that might incentivize market players to discontinue operations in the United States

is, we respectfully submit, not one of the policy goals of the Act. This would have a significant and

immediately detrimental effect on the U.S. economy. Additionally, fewer firms in the United States

could lead both to increased prices due to reduced competition and to increased systemic risk since the

bulk of the market will be concentrated in fewer players.

ln addition, the BD capital rules may require significantly greater capital when client margin is held away from a

BD, but Title VII margin rules require Swap Dealers to offer that as an option.
Clarification of the Extent of the Extra-territorial Reach of Title Vll

Clear Definitional Boundaries Needed

No matter what Swap Dealer registration alternatives are adopted, it is critical to establish clear

boundaries to the jurisdictional reach of Title Vll. Title Vll of the Act is not applicable to Swaps activities

outside the United States unless those activities "have a direct and significant connection with activities

in, or effect on, commerce of the United States" (Section 722). In the case of Security-based Swaps, Title

Vll does not apply to persons insofar as they transact business "without thejurisdiction of the United

States" (Section 772). To create regulatory certainty about the jurisdictional scope of these sections, we

request that the Commissions, by definition, limit the offshore scope of Title Vll to a well-defined U.S.

part of a foreign bank's Swaps business.

We believe that a foreign bank would be more likely to register as a Swap Dealer under Title Vll

if the jurisdictional scope of Title Vll is clearly defined to apply to a U.S. subset of the bank's global

derivatives business. Further, it will be impractical for many foreign banks to register as a Swap Dealer

without this definitional assurance from the Commissions. Without such assurances, foreign prudential

regulators are not likely to allow foreign banks to register as Swap Dealers because of a concern that the

Commissions could apply their regulatory authority to overseas activities that foreign prudential

regulators consider their exclusive province. We believe that many foreign banks will benefit from a

clarification of the extent of the Act's offshore reach.

We respectfully request the Commissions to coordinate with their foreign counterparts,

especially those based in Europe, and to work toward a memorandum of understanding ("MOU") on the

jurisdictional reach of U.S./EMIR derivatives rules. An MOU could also outline information sharing,

consultation, coordination and cooperation standards in the derivatives markets, which would help

increase transparency and comparability of regulation across jurisdictions. Nevertheless, we understand

that the Commissions are under significant time pressure to complete their Title Vll rulemaking and full

international coordination may not be possible in the timeframe. More immediately, we believe the

Commissions can give definitional content to Sections 722 and 772 of the Act without full international

coordination and that such content should be sufficient to allow foreign banks to begin operational

planning for the implementation of Title Vll.

Cate o -Based Definitional Pro osal

We propose that Title Vll apply only to a clearly defined U, S.subset of a foreign bank's global

derivatives business. We have considered how best to draft such definitions. Our proposal, which

divides the global Swaps business of a foreign bank into three jurisdictional categories, is set forth

below. Each category of activity would be treated differently from a regulatory perspective. Even if the

Commissions do not accept this proposal in its entirety, clarification is urgently needed on the

jurisdictional issues to allow for timely implementation of Title Vll.
Cate o 1:Swa s activit from within the 'urisdiction of the United States

In this category, an employee based in the United States sells a Swap to a customer located

either in the United States or offshore. The relevant Swap could be uncleared, or cleared inside or

outside the United States on a registered clearing organization. Category 1 is the typical operating

model for many clients based in the United States, where they have banking relationships with

derivatives dealers and execute derivatives through those relationships interfacing with sales persons in

the United States.

Swaps in this category would be fully regulated under Title Vll regardless of (i) whether. and

where such Swaps were cleared, (ii) whether sold to a U.S. or non-U. S. customer, and (iii) whether based

on a U.S. or non-U. S. reference asset.

While we believe category 1 is the strongest candidate for the exercise of U.S. regulatory

authority, even in this category there could be regulatory uncertainty over Swaps sold to non-U. S.

Persons. For example, a Swap sold by a salesperson in the United States to a customer in Germany

would be regulated by the Commissions under this category. However, German regulators might assert

jurisdiction over this Swap (just as U.S. regulators might assert jurisdiction over Swaps in category 2

below). Mutual agreements among international regulators will be important even within category 1 to

bring regulatory consistency to the highly globalized Swaps market.

Cate o 2: Swa s activit with some U.S. nexus but with a si nificant risk of com etin and

conf lictin re ulation.

In this category, an employee based outside the United States sells a Swap to a customer

located in the United States (a "U.S. Person" ).

"

The relevant Swap could be uncleared, or cleared inside

or outside the United States by a clearing house. Some large U.S.-domiciled international clients

sometimes trade using this arrangement because they prefer to deal with salespeople close to the

source of the product. When buying Swaps linked to a European asset, for example, these clients would

prefer to deal directly with SG salespersons in Europe, who have expertise in the product, pricing and

market. For these clients, which tend to be large asset managers and hedge funds, it would be

impractical to not be able to deal in this manner.

Swaps activity in this category would potentially be subject to both the jurisdiction of Title Vll

and legislation promulgated by the sales person's home jurisdiction. In the case of SG, a French

salesperson might have to comply with Title Vll, on the one hand, and the EMIR rules and the rulemaking and examination authority of the French financial industry regulator, the Autorite des Marches

Financiers ("AMF"), on the other hand. We recognize that the Commissions may wish to exert

We are using the term U.S. person in a general sense here and not in the sense as proposed by the SEC in its

release dated November 19, 2010. Regulation SBSR, Exchange Act Release No. 63446 (Nov. 19, 2010) at 119. We

may comment on that proposed definition at a later time.
jurisdiction over activities in category 2 due to the presence of a U.S. Person as the client of SG Paris or

the clearance of the Swap in the United States.

"

We suggest that the Commissions reasonably exercise

this jurisdiction mainly by relying on the rules and enforcement of EMIR and the AMF. The Commissions

would, by rule, apply the requirements of jurisdictions whose regulations support and enforce

regulatory objectives that are substantially equivalent to those supported and enforced by Title Vll. The

Commissions could then by order determine whether the AMF satisfies this requirement. If this

determination is made, the Commissions would exercise their regulatory authority over category 2

activities by mainly deferring to the EMIR and AMF.

The Commissions, however, would not cede all regulatory authority over activities in this

category. They would retain the authority to conclude at any time that the AMF is not enforcing EMIR

and/or that the EMIR rules are not substantially comparable, in which case, the Commissions would

exert the full amount of their Title Vll authority. We also imagine there could be significant cross-border

information sharing among regulators about activity in this category and that the Commissions could

have additional transparency on category 2 activities through such sharing.

Given that the United States will implement Title Vll earlier than Europe will implement EMIR,

we propose that the Commissions establish a transition period for Foreign Swap Dealers with home

country regulators that are actively working to establish a comprehensive regulatory framework for

swaps and determine at a later specified date whether European rules are substantially equivalent to

those of the Commissions. In light of the announcements by the CFTC Chairman that he is "confident

that (the CFTCJ will bring strong and consistent regulation to both the European and U.S. swaps

markets, "anticipating in the U.S. regulatory framework the need for a transition period as the systems

align would make sense.

"

The SEC's recent rule proposal for reporting and dissemination of security-based swap information states that

the SEC preliminarily believes that it has jurisdictional authority to compel reporting of security-based swaps

executed by a U.S. person anywhere in the world. Id. at 118. We may comment on that assertion at a later time.

This "actively working" concept is already used in U.S. Iaw. For example, the International Banking Act permits

the Federal Reserve to approve a foreign bank's application to establish a U.S. branch, even though the foreign

bank is not subject to comprehensive supervision by its home country authorities, provided that "the appropriate

authorities in the home country of the foreign bank are actively working to establish arrangements for the

consolidated supervision ofsuch bank. " The Dodd-Frank Act itself also reflects this concept by permitting the SEC

to terminate the broker-dealer registration of a foreign person that poses a risk to U.S. financial stability "ifthe SEC

determines that the home country of the foreign person has not adopted, or made demonstrable progress toward

adopting, an appropriate system offinancial regulation to mitigate such risk" (Section 173(c)) and by permitting

the Federal Reserve to do the same with respect to a U.S. branch, agency or commercial lending company of a

foreign institution (Section 173(a)). In other cross-border contexts as well, the SEC has adopted transition concepts

such as in the implementation of International Financial Reporting Standards and Section 404 of the SarbanesOxley Act.

10
We believe that there are strong public policy and practical reasons for the Commissions to

adopt the category 2 approach of deference to foreign regulators where the foreign regulators have a

comparable regulatory scheme. There are many reasons why the Commissions should consider this

approach:

~ It respects the prudential regulatory authority of foreign regulators. This is important generally

and in respect to category 1, where there will be Swaps sold from the United States to non-U. S.

Persons. Regulators in the jurisdictions of those non-U. S. Persons might want to assert

regulatory authority over those transactions. The Commissions could point to their regulatory

forbearance in category 2 as a policy reason why foreign regulators should not assert their

authority over activity occurring mainly in the United States.

It helps to avoid regulatory retaliation against category 1 activity by foreign regulators, the

disruption and cost of which could be significant to U.S, and foreign banks. Without mutual

cooperation between the U.S. regulators and foreign regulators, we are concerned that the

regulation of the Swaps market could devolve into regulatory chaos, thereby increasing

systematic risk.

It helps to minimize regulatory uncertainty resulting from compliance with multiple and

competing regulations. Regulatory uncertainty can allow for regulatory arbitrage while clear

rules on jurisdictional issues decreases the possibility of regulatory arbitrage.

It allows foreign banks to avoid or significantly lessen the problem of competing regulatory

authority. While we believe that the EMIR rules will be substantively the same as those in Title

Vll, there are small differences that will have a big impact on implementation. For example,

Title Vll requires Swap Dealers to distinguish between their clients that are Swap Dealers, Major

Swap Participants or neither but meet the so-called commercial end user definition. EMIR also

categorizes clients but does so differently, into financial and non-financial counterparties using

numerical thresholds.

It avoids challenges to Title Vll rulemaking regarding the extent of U.S. extraterritorial

jurisdiction based on principles set forth by the U.S. Supreme Court in Morrison v National

Australia Bank Ltd. , 130S.Ct. 2869 (2010).

It allows foreign banks to comply with foreign privacy rules which, in general, may prohibit the

reporting of certain information relating to certain clients.

Finally, it allows the Commissions to use their limited resources efficiently without

compromising their duty to ensure effective oversight of the Swaps market.

If the Commissions do not rely on home country regulation of category 2 activities, foreign

banks may be forced to refrain from dealing with U.S Persons from outside the United States, which

11
would deprive U.S, Persons from access to the most knowledgeable expertise about non-U, S derivative

products.

Finally, even if the Commissions believe that certain of the Title Vll Swap Dealer duties are so

significant that they cannot defer to a foreign bank's home-country regulations for these duties, we

suggest that the majority of Title Vll duties can be treated in the manner we have described. For

example, the Commissions may conclude that there are no "special entity" business conduct rules in

EMIR and therefore~aly their special entity business conduct rules to category 2 activities.

Notwithstanding such a determination, it would still be reasonable for the Commissions to rely on EMIR

rules for other aspects of Title Vll compliance.

Cate or 3:Swa sactivit thatdoesnothavea U.S. nexus.

In this category, an employee based outside the United States sells a Swap to a customer

located outside of the United States. The relevant Swap could be uncleared or cleared. Swaps in this

category have no nexus to the United States other than that, in our model, they are booked in a

registered Foreign Swap Dealer.

Swaps in category 3 should be entirely ring-fenced and outside the scope of the Commissions'

examination and regulatory authority. This is a critical part of our proposal and one that we believe will

be a requirement for our home-country regulators to accept Foreign Swap Dealer registration. Even if

the Commissions believe that they have jurisdiction over these activities, we recommend that they not

exercise such jurisdiction. We recognize that the SEC preliminarily believes it has jurisdiction, at least

with respect to its reporting rules, over any Security-based Swap cleared through a clearing agency

having its principal place of business in the United States, even if the Security-based Swap is entered

into between two non-U. S. Persons acting outside the United States.

"

If the SEC continues to believe

this, and if the CFTC takes this position as well, we believe that the Commissions could require that this

narrow subset of category 3 activity be reported to a Swap data repository without exercising further

jurisdiction over all the activity in category 3. This solution would provide the Commissions and U.S.

market participants with information about Swaps cleared in the United States without conflicting with

foreign regulatory schemes.

Further, in preliminary response to the CFTC's request for comment as to what level of Swap

dealing activity outside the United States would qualify as having a direct and significant connection

with activities in or effect on commerce of the United States,

"

we firmly believe that where a non-U. S.

entity based outside the United States engages in Swaps with persons outside the United States, such

activity should not give rise to Swap Dealer registration.

Regulation SBSR at 120.

Registration of Swap Dealers and Major Swap Participants, RIN 3038-AC95 (November 10, 2010) at 16.

12
As mentioned at the beginning of our letter, the global nature of Swaps activities poses

significant and challenging jurisdictional questions. We believe that even if the Commissions determine

they have jurisdiction over all Swaps of a foreign bank Swap Dealer, that they limits their exercise of

such jurisdiction to a particular sub-set of Swaps.

Timin of Jurisdictional Cia rit

It is critical to obtain certainty regarding the jurisdictional scope of Title Vll as early in the

rulemaking process as possible. Whether an entity is registered as a Swap Dealer, Foreign Swap Dealer,

or Non-Booking Swap Dealer, the internal changes required by any major foreign derivatives dealer,

such as SG, are significant. Most dealers maintain numerous transaction booking, risk management,

client referential and data processing systems that operate globally. These systems are complex and

highly interconnected. Virtually all of these systems will have to change in order for any type of Swap

Dealer registration to be operationally implemented. Systems changes are time consuming, costly and

require extensive testing prior to use. We have considered the changes that we would need to

undertake in order to achieve compliance with the Act by the implementation date and these cannot be

done in a short time frame. We urge the Commissions to appreciate the ramifications that their

rulemaking will have on globally operating foreign (and U.S.) banks and to provide clarity on

jurisdictional issues as quickly as possible.

A lication of Title Vll Ca ital and Mar in to Forei n Banks

Sections 731 and 764 of the Act state that the Federal Reserve is responsible for setting the

prudential requirements for registered Swap Dealers that are subject to its supervision, such as foreign

banks. The Federal Reserve will be responsible for setting the capital and margin requirements for SG

r

Paris as a registered Swap Dealer because SG's New York branch is supervised and regulated by the

Federal Reserve. We believe that the Federal Reserve should look to the prudential requirements of

foreign prudential regulators in setting such requirements for foreign banks, at least where the Federal

Reserve finds that the foreign prudential regulator has comparable prudential standards. In the case of

SG, the Federal Reserve would defer to the Autorite de Controle Prudentiel (the "ACP"), SG Paris's home

country banking regulator.

~Ca ital

The Federal Reserve should be comfortable deferring to prudential requirements of foreign

regulators, such as the ACP, that have adopted Basel capital standards. As a result of the Basel Capital

Accords, there is now greater consistency of capital requirements across the United States and other

countries, and with the impending adoption of Basel III in the United States, Europe and Asia, capital

requirements for participating countries' banks will be even further aligned. In accordance with Basel

capital standards, foreign banking regulators will require foreign banks to hold greater capital to support

their Swaps business. The new leverage ratio under Basel III will measure capital to total exposure, the

latter of which will include derivatives exposure. In addition, the Basel Committee on Banking

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Supervision recently reaffirmed its agreement to introduce higher capital requirements for trading book

exposures, .counterparty credit risk and exposure to other financial institutions. The new Basel III capital

requirements are expected to be promulgated into law in 2011 and implemented in January 2013 as

part of the broader European derivatives reform.

Imposing U.S. capital rules on foreign bank Swap Dealers would be potentially unworkable

because the foreign bank would continue to also be subject to home country capital requirements. If

the Federal Reserve were to apply U.S. capital rules to a foreign bank Swap Dealer, the foreign bank

would need to monitor and report on its compliance with two different capital regimes, each of which

has its own definitions, parameters and qualifications. This would be contrary to the Federal Reserve's

current regulation of foreign banks with respect to capital. The Federal Reserve generally relies on the

home country's classification of capital and determination that a foreign bank is well-capitalized for

purposes of treating the bank as a financial holding company and applying the source of strength

requirement to foreign banks. In doing so, the Federal Reserve defers to the home country and does

not substitute its view of the quality of a foreign bank's capital components. We request that this longstanding practice of relying on home country prudential requirements also be applied to Swap Dealer

regulation under Title Vll.

~Mar in

We believe that the Federal Reserve should also look to foreign regulators in setting margin

requirements for foreign bank Swap Dealers. The Basel Committee has agreed on tougher margin

requirements for swaps, and margin requirements will be reflected in the EMIR rules.

"

However,

because both the United States and the European Union have yet to determine the specific margin

amounts for uncleared Swaps, the Federal Reserve could consider applying U.S. margin requirements for

Swaps that are part of a foreign bank's U.S. business until this issue is resolved in Europe and

comparisons to U.S requirements are possible. If the Federal Reserve were to reach this conclusion, it

would be critical for the Commissions to resolve the extraterritorial scope issues so that foreign banks

can implement these requirements.

Cleared transactions will be required to comply with clearinghouse margin rules. We have assumed that the

clearinghouses will be either registered with the Commissions or subject to their regulatory oversight.

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Conclusion

Societe Generale takes seriously its obligation to comply with the highest standards of law in

every jurisdiction in which it does business and intends to comply in full with the Act. We are

committed to implementing Title Vll in a timely manner as prescribed by the Commissions' regulations.

We hope the Commissions will agree on the need for flexibility in Swap Dealer registration and

expeditious regulatory clarity on the extent of extraterritorial jurisdiction under Title Vll of the Act and

the application of prudential requirements to foreign bank registrants.

Respectfully,

Laura S is all

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