As a result of commitments made at the G20 in 2009, member states across the globe are engaging in a number of regulatory reform initiatives addressing derivatives. Though the G20 members agreed to some basic principles of regulation, and officials say that some level of cooperation and coordination is happening, the proposed regimes are not identical, and each may have extraterritorial effects. These new sets of rules and regulations emanating from each jurisdiction's initiative may present some difficult compliance issues for end users of derivatives with global trading operations. Sidley & Austin has put together a report comparing and contrasting some of the provisions and new regulations under the US's Dodd-Frank Act and those under the EU's European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID II). This report should help clarify areas where compliance issues may arise for global traders.
The G20 members agreed at their September 2009 meeting on some basic principles for derivatives regulatory reforms. These included:
- all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest;
- OTC derivative contracts should be reported to trade repositories; and
- non-centrally cleared contracts should be subject to higher capital requirements
The US and EU reform proposals track these principles, but the Sidley report highlights some differences between the scope, definitions, and cross-jurisdiction effects of the these two proposed regulatory regimes. For example, unlike the U.S., the EU (EMIR) does not expressly provide any exemption for foreign exchange derivatives. In addition, the EU and US structures contain differences in which entities must comply with the new clearing and trading obligations. Also, some differences are emerging between the EMIR and MiFID II, the two parallel proposals in the EU. It is unclear at this stage when these differences will be reconciled making it even more difficult for market participants to prepare for compliance obligations.
Both the Dodd-Frank Act and EMIR/MiFID II anticipate the need for international coordination of OTC derivatives reforms and regulation, both in formulation and on a going-forward basis. EMIR and MiFID II apply to OTC derivative contracts eligible for clearing/trading on trading venues which have a “direct, substantial and foreseeable effect within the EU” or where such obligation is necessary or appropriate to prevent the evasion of any provision of EMIR/MiFID II. Similarly, Title VII of the Dodd-Frank Act applies where activities relating to CFTC-governed swaps have a "direct and significant connection with activities in, or effect on, commerce of the United States." At this time, there is little clarity as to what these broad terms mean, and what actors and activities may be swept up in them.
The
SEC and others have assured that their rulemaking efforts are being coordinated across borders. But, it is unclear when or if the differences between the US and EU efforts will be addressed. In addition, global market participants should keep in mind that these are merely two of the many derivatives regulatory reform efforts currently underway.