Tuesday, July 30, 2013

EU and US Announce Landmark Pact on Cross-Border Derivatives


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

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.
On July 11, 2013 European Commissioner Michel Barnier and United States Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler announced a Path Forward regarding their joint understandings on a package of measures for how to approach cross-border derivatives. This new pact responds to the G20 commitment to lower risk and promote transparency in the over-the-counter (OTC) derivatives markets, but in a way that recognizes the challenges of regulating what is now understood to be a virtually borderless market. Pledging cooperation, the EU and US hope to ensure that regulations put in place "pursue the same objectives and generate the same outcomes." Much coordination between US and EU regulators has already in many places resulted "in final rules are essentially identical, even though the regulatory calendars are not always synchronized."

The CFTC and the EC, with ESMA, have worked closely and collaboratively to implement their rules and regulations to avoid [conflicts] 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.
In order to foster harmonization of EU and US cross-border derivatives regulations, the CFTC will entertain and will likely be generous with no-action relief, provided applicants act in good faith compliance with one set of regulations.  For example:


  • 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.
Going forward, the EC, ESMA, and 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. 

  • ensuring that the overseas guaranteed subsidiaries and branches of US and EU persons are not allowed to operate outside of important G20 reforms.

  • resolving issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws. 

With respect to central counterparties the CFTC and EMIR have devised international minimum standards.  They note that "central counterparty initial margin coverage is the only key material difference and the parties will work together to reduce any regulatory arbitrage opportunities."  They will also work together to ensure that CCPs that have not yet been recognized or registered in the US or the EU will be permitted to continue their business operations.

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