The European Commission and the US Commodity Futures Trading Commission (CFTC) announced a high-level joint understanding (Path Forward) regarding an approach to the cross-border regulation of the over-the-counter (OTC) derivatives markets.
The Path Forward comes on foot of the commitment made by the leaders of the G20 nations three and a half years ago to lower risk and promote transparency in the OTC derivatives markets, which are widely seen as having been at the heart of the global financial crisis.
Much progress has been made in the regulation of OTC markets on both sides of the Atlantic over the past number of years with the implementation of the European Market Infrastructure Regulation (EMIR) and the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Close legislative and regulatory co-ordination between the Commission and the CFTC have ensured that the rules in the United States and in Europe pursue generally the same objectives and generate the same outcomes. However, it is acknowledged that notwithstanding the high degree of similarity between the two regimes, subjecting the international trade in OTC derivatives to simultaneous application of both sets of rules will undoubtedly lead to legal uncertainty and conflicts of law.
Accordingly, the Commission and the CFTC have developed the Path Forward, with a view to addressing issues that arise where two sets of rules (EMIR and Dodd-Frank) cover the same trade.
The five key elements of the Path Forward are:
- Narrower territorial scope - market participants should be subject to only one set of rules
- Greater mutual recognition of rules so that market participants from the US and the EU can, in certain circumstances, determine their own choice of rules to apply to a trade
- The introduction of a transitional regime for some European Central Counterparties so as to prevent them from being forced to close down clearing US trades
- A temporary exemption from US trading rules for European trading venues until new European rules for Markets in Financial Instruments – which deal with derivatives trading - have been adopted
- The introduction of measures to reduce regulatory arbitrage opportunities
The Path Forward is seen as a statement of understanding between the CFTC and the European Commission and so does not address some of the more controversial issues of cross-border regulation. However, both the CFTC and the European Commission have indicated their intention to adopt a collaborative approach in addressing any issues that may, and are likely to, arise. Discussions are to conclude as soon as possible.
Both the EU and the US have invited other jurisdictions to join the approach represented by the Path Forward.