Signed And Sealed! Cross-Border Derivatives Methodology Agreed On Both Sides Of The Atlantic

The Commodity Futures Trading Commission today announced that it has reached a common path forward with European Union officials on

US regulatory authorities have been engaged in procedural talks with European Union governmental officials for quite some time now with regard to the proposed rulings relating to cross-border derivatives.

Today, senior representatives on both sides of the Atlantic reached a point where they are able to announce a path forward regarding their joint understandings on a package of measures for how to approach cross-border derivatives.

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The officials concerned were Gary Gensler, Chairman of the US Commodity Futures Trading Commission (CFTC), and European Commissioner Michel Barnier.

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Commissioner Barnier stated on behalf of the European Commission that “our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends.”

Chairman Gensler , on behalf of the CFTC made a public statement today: “With these joint understandings, together, we’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide.  I want to thank Commissioner Barnier and all his colleagues for their constructive collaboration throughout this reform process.”

As is to be expected with large, bureaucratic rulings, industry debate within regulatory circles, FX market participants, technology companies and trade repositories has been extensive this year, the most recent of which was a panel discussion held in London on June 30, bringing together senior industry executives. Forex Magnates was party to this discussion, which detailed the various responsibilities of each participant surrounding transparency of trade reporting under the Dodd-Frank rulings.

Earlier this year, Mr. Gensler addressed the US Senate panel in February, subsequent to which Elisse Walker, the Chairman of the Securities and Exchange Commission measured the progress made until that meeting as “tremendous” in terms of understanding how the market as a whole can work toward applying a “significant effort to increase transparency, mitigate risk, protect against market abuse in security-based swap markets, improve the oversight of credit rating agencies and hedge fund and other private fund advisers, and develop a better understanding of the systemic risk presented by large private funds.”

Whilst the CFTC is still deliberating over the finer detail with relation to how trade reporting should be carried out, and although a number of firms responsible for this, such as Traiana, are as informed as they can be, there are some points yet to be finalized.

A Firm Decision Made

With Japan already working with the US Government on cross-border regulatory commonality, cohesion has not yet been achieved. With today’s European agreement, the collaboration between government officials of the two continents potentially paves the way for other aspects of the Dodd-Frank Act such as the above mentioned trade reporting responsibilities and swap execution facility (SEF) establishments to be implemented in Europe under MiFID.

The Path Forward relating to cross-border derivatives responds to the G20 commitment to lower risk and promote transparency in the over-the-counter (OTC) derivatives markets, which were are at the heart of the financial crisis. The CFTC and the European Commission share a common objective of a steadfast and rigorous implementation of these commitments.

Together with the European Securities Market Authority (ESMA), the European Commission (EC) and the United States have made significant progress in their regulatory reforms.

Close legislative and regulatory co-ordination and co-operation between the European Commission (EC) and the CFTC has ensured that the rules in place pursue the same objectives and generate the same outcomes.

As a result of the joint collaborative effort, in many places, final rules are essentially identical, even though the regulatory calendars are not always synchronized.

As the market subject to these regulations is international, it is acknowledged that, notwithstanding the high degree of similarity that already exists between the respective requirements, without coordination, subjecting the global market to the simultaneous application of each other’s requirements could lead to conflicts of law, inconsistencies, and legal uncertainty.

The CFTC and the EC, with ESMA, have worked closely and collaboratively to implement their rules and regulations to avoid this to the greatest extent possible and consistent with international legal principles.

The CFTC and the European Commission share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.

For bilateral uncleared swaps, and because EU and US rules for risk mitigation are essentially identical, the CFTC plans to issue no-action relief for certain transaction-based requirements. In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.

For the trading-execution requirement, the CFTC plans to permit foreign boards of trade that have received direct access no-action relief to also list swap contracts for trading by direct access to avoid market and liquidity disruption.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.

Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight. The CFTC staff will issue no-action letters to this effect.

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In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs. Both parties will in January 2014 assess progress.

The EC, ESMA, and the CFTC will continue to work together on similar approaches to straight-through-processing and harmonized international rules on margins for uncleared swaps and have essentially identical processes with regard to adopting mandatory clearing obligations and regulating intra-group swaps/derivatives trades. They also share common goals of ensuring that the overseas guaranteed subsidiaries and branches of US and EU persons are not allowed to operate outside of important G20 reforms.

Their approaches for reporting to trade repositories are also very similar and the EC, ESMA and the CFTC will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws. They will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

With respect to central counterparties (CCPs), CFTC rules and EMIR are both based on international minimum standards. CCP initial margin coverage is the only key material difference and the parties will work together to reduce any regulatory arbitrage opportunities. They will also endeavour to ensure that CCPs that have not yet been recognised or registered in the US or the EU will be permitted to continue their business operations.

Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief awarded by the CFTC will be reflected in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership. For the future, they have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of their respective rules.

The EU and the US are leading by example and invite others countries to join this approach to make sure that the G20 commitments will be applied in a sensible and rigorous way to cross-border derivatives trades.

Intercontinental Progress

Close legislative and regulatory co-ordination and co-operation between the European Commission (EC) and the Commodity Futures Trading Commission (CFTC) has ensured that the rules in place pursue the same objectives and generate the same outcomes.

According to the CFTC, both regimes will have strict legal requirements in place governing central clearing, trade reporting, and trade execution. The CFTC is in the process of implementing such regulations and the EC has adopted the regulations giving effect to these requirements.

Pursuant to the CFTC’s respective legislative frameworks and mandates, certain EU rules are stricter in some areas and certain US rules are stricter in others. The calendar of compliance dates is not always synchronized due to differences in legislative and rulemaking processes, but that does not change the common goal or common approach shared by both regulators.

Transparency and Trading

The CFTC plans to clarify that where a swap is executed on an anonymous and cleared basis on a registered designated contract market (DCM), swap execution facility (SEF), or foreign board of trade (FBOT) the counterparties will be deemed to have met their transaction-level requirements, including the CFTC’s trade-execution requirement.

To date, an FBOT operating pursuant to a direct access no-action relief letter may permit identified members or other participants located in the US to enter trades directly into the trade matching system of the FBOT only with respect to futures and option contracts.

However, an FBOT registered pursuant to Part 48 of the CFTC’s regulations also can list swap contracts for trading by direct access, subject to certain conditions. In view of the apparent interest on the part of certain FBOTs operating pursuant to the no-action relief in listing swaps for trading by direct access, the CFTC’s Division of Market Oversight plans to amend the no-action letters to permit those FBOTs to list swap contracts, subject to certain conditions.

In the future, registered FBOTs will be permitted to list swap contracts for trading by direct access, subject to the same conditions.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.

Such relief would be available for Multilateral Trading Facilities (MTFs) that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight. The CFTC staff will issue no-action letters to this effect.

In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs. Both parties will in January 2014 assess progress.

While important EU rules on mandatory trade execution and trading platforms under the Markets in Financial Instruments Directive and Regulation are almost complete, the regulator is working collaboratively to share ideas and ensure harmonization to the maximum extent possible.

With respect to derivatives clearing organizations (DCOs) and central counterparties (CCPs), CFTC rules and the European Market Infrastructure Regulation are both based on international minimum standards.

CCP initial margin coverage is the only key material difference and the two regulatory authorities will work together to reduce any regulatory arbitrage opportunities. The CFTC has confirmed that it will ensure that DCOs/CCPs that have not yet been recognized or registered will be permitted to continue their business operations.

The EC, the European Securities and Markets Authority, and the CFTC believe it is important that jurisdictions and regulators should be able to defer to each other where this is justified by the respective quality and enforcement of regulations. Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief as described herein will be reflected by the CFTC in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership.

For the future, the US and EU have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of their respective rules.

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