On October 13, the Commodity Futures Trading Commission and the European Commission (EC) made three announcements that are significant for cross-border swap activity between the United States and Europe.
1. CFTC Margin Rule Comparability Determination.
The CFTC has made a determination that the margin rules for uncleared swaps that apply in the European Union are comparable to the CFTC’s margin rules. This determination activates the substituted compliance provisions found in Section 23.160(b)(2)(iii) of the CFTC margin rules that until now have not been available to EU entities registered as swap dealers. The CFTC’s summary of the determination is as follows:
“Accordingly, a CSE [Covered Swap Entity] that is subject to both the Final Margin Rule and the EU’s margin rules with respect to an uncleared swap that is also a non-centrally cleared OTC derivative may rely on substituted compliance for all aspects of the Final Margin Rule and the Cross-Border Margin Rule. Any such CSE that, in accordance with this comparability determination, complies with the EU margin rules, would be deemed to be in compliance with the Final Margin Rule but would remain subject to the Commission’s examination and enforcement authority.”
This determination does not apply to bank swap dealers, which must wait until a similar comparability determination is made by the US prudential regulators before substituted compliance can be used under the prudential regulator margin rules.
In addition, the determination only applies to a transaction that is both a swap (as defined in the Commodity Exchange Act) and an over-the-counter (OTC) derivative (as defined by the EU), so it will not help when deliverable FX forwards and FX become subject to the EU margin rules on January 3, 2018 (since they are not swaps under US law).
The CFTC press release is available here.
The determination is available here.
2. European Commission Equivalence Decisions
The EC has taken similar action by adopting two equivalence decisions with respect to US swap regulations that allow both parties to a swap to comply with US swap rules instead of EU rules when one of the parties is a US person that is registered as a swap dealer and one is an EU person subject to EU swap rules.
One decision relates to swap margin:
“. . . the legal, supervisory and enforcement arrangements of the USA for the exchange of collateral that are applied to transactions regulated as ‘swaps’ by the Commodity Futures Trading Commission (CFTC) . . . and that are not cleared by a CCP shall be considered as equivalent to the requirements of Article 11(3) of Regulation (EU) No 648/2012, where at least one of the counterparties to those transactions is established in the USA and registered with the CFTC as a swap dealer or major swap participant, and that counterparty is subject to the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants and the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross Border Application of the Margin Requirements.”
The equivalence decision has the same limitations as the US comparability determination—it only relates to the CFTC swap margin rules, not the prudential regulator margin rules and only covers OTC derivatives that are subject to mandatory margining under both EU law and CFTC regulations.
The second decision relates to risk mitigation rules (meaning requirements concerning timely confirmation, portfolio compression, reconciliation, valuation and dispute resolution):
“. . . the legal, supervisory and enforcement arrangements of the United States of America (USA) for operational risk-mitigation techniques that are applied to transactions regulated as ‘swaps’ by the Commodity Futures Trading Commission (CFTC) in accordance with section 721(a)(21) of the Dodd-Frank Act and that are not cleared by a CCP shall be considered as equivalent to the requirements set out in paragraphs 1 and 2 of Article 11 of Regulation (EU) No 648/2012, where at least one of the counterparties to those transactions is established in the USA and registered with the CFTC as a swap dealer or major swap participant.”
The EC equivalence decisions are available here.
3. Joint CFTC-EC Announcement Concerning Derivatives Trading Venues
The CFTC and the EC jointly issued a paper entitled “A Common Approach on Certain Derivatives Trading Venues,” which describes the intention of each party to allow swap market participants to use any regulated swap trading platform in the US or the EU to satisfy mandatory trade execution requirements. Implementation of this intention will require the EC to adopt an equivalence decision with respect to CFTC-authorized swap execution facilities (SEF) and designated contract markets (DCMs) and the CFTC to exempt trading venues authorized in accordance with the Markets in Financial Instruments Directive (MiFID II)/Markets in Financial Instruments Regulation (MiFIR) requirements from possible SEF registration.
The announcement says that “[t]he CFTC staff and the EC services will work as expeditiously as practicable to ensure that this arrangement is put into place and operating in a coordinated manner. . . .”
The announcement is available here.