On March 16, 2016, the European Commission published its equivalence decision on the derivatives regulatory regimes for derivatives clearing organisations in the United States was published in the Official Journal of the European Union. The decision follows the announcement by the European Commission and the Commodity Futures Trading Commission of a common approach on the supervision of CCPs operating in the US and EU. The decision provides that the legal and supervisory arrangements of the CFTC for DCOs that are systemically important derivatives clearing organizations (SIDCOs) by the Financial Stability Oversight Council or DCOs that have opted into additional standards similar to the SIDCO regime (so-called “Subpart C DCOs”) are equivalent to the EU requirements under EMIR, provided that the DCO’s internal rules and procedures meet the following requirements: (i) for derivatives contracts executed on regulated markets, a minimum liquidation period of two days for initial margin is applied to clearing members’ proprietary positions; (ii) for all derivative contracts, measures are in place to limit procyclicality which are equivalent to the requirements under EMIR; and (iii) the DCO has sufficient pre-funded available resources enabling it to withstand the default of at least two clearing members to which it has the largest exposures under extreme conditions. The decision provides that these additional conditions will not apply to US agricultural commodity derivatives traded and cleared domestically within the US, in light of the nexus of these contracts with the US economy, the importance of the contracts to US agricultural providers and the low degree of systemic interconnectedness of agricultural products with the rest of the financial system. The decision does not cover derivatives which are subject to the oversight of the Securities and Exchange Commission (i.e., derivatives based on a single security (a bond or share) or loan or narrowbased index of securities).
On the same day, the CFTC adopted a substituted compliance determination for DCOs that are also EU CCPs under which an EU CCP could comply with the EU requirements on financial resources, risk management, settlement procedures and default procedures instead of the CFTC requirements. Such substituted compliance will be available to EU CCPs that are currently registered as DCOs, as well as EU CCPs seeking to become registered as DCOs. The CFTC staff has also clarified that certain CFTC requirements will not apply to non-Futures Commission Merchant clearing members (and their customers) of EU CCPs that are DCOs.
The EU equivalence decision is available at: http://eur-lex.europa.eu/legalcontent/EN/ALL/?uri=uriserv:OJ.L_.2016.070.01.0032.01.ENG&_sm_au_=iVVG7Vkj0Zn2njmQ and the CFTC substituted compliance determination is available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister031616.pdf.
You may wish to view our client note, “Update on Equivalence under EMIR,” March 17, 2016: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/03/Update-on-Third-Country-EquivalenceUnder-EMIR-FIAFR-031716.pdf.