Derivatives Quarterly Newsletter: 2nd Quarter 2017

On May 3, 2017, the CFTC voted to propose amendments (Proposed Amendment) to certain CFTC regulations (Existing CCO Rules) governing the duties and annual reporting requirements of chief compliance officers (CCOs) of CFTC-registered swap dealers, MSPs and FCMs. The Proposed Amendment is not intended to change the CCO’s role and responsibilities substantively, but is designed to incorporate industry feedback received by the CFTC since the adoption of the Existing CCO Rules, clarify several interpretive issues and harmonize the Existing CCO Rules with the SEC’s recently adopted rules that apply to CCOs of security-based swap dealers and major security-based swap participants. Comments on the Proposed Amendment were to be submitted to the CFTC on or before July 7, 2017. For more information, see the Sidley Update on this subject available at: https://www.sidley.com/en/insights/newsupdates/2017/05/cftc-proposesamendment. A copy of the Proposed Amendment is available at: https://www.gpo.gov/ fdsys/pkg/FR-2017-05-08/pdf/2017-09229.pdf. CFTC Adopts Long-Awaited Amendments to Recordkeeping Rules On May 23, 2017, the CFTC approved final amendments (Rule 1.31 Amendments) to the recordkeeping obligations set forth in CFTC Regulation 1.31 (Recordkeeping Rule). The Rule 1.31 Amendments are a long-awaited response to multiple industry groups’ petitions for rulemaking urging the CFTC to modernize its Recordkeeping Rule by eliminating references to outdated technology and industry practices that had made the rule unduly burdensome and costly for the industry. The Rule 1.31 Amendments principally seek to address such outdated and irrelevant obligations by eliminating technology-specific requirements and instead focusing on the integrity and availability of regulatory records generally. Significant aspects of the Rule 1.31 Amendments include making the form and manner in which records must be kept technology-neutral and removing a requirement for recordkeepers to hire third-party technical consultants. For more information, see the Sidley Update on this subject at: https:// www.sidley.com/-/media/update-pdfs/2017/06/20170612-cftc-approvesamendments-to-recordkeeping-rules.pdf. A copy of the CFTC adopting release is available at: http://www.cftc.gov/ idc/groups/public/@lrfederalregister/documents/file/2017-11014a.pdf. U.S. DERIVATIVES DEVELOPMENTS: CFTC AND NFA..................................1 EUROPEAN DERIVATIVES DEVELOPMENTS ............................... 6 ASIA DERIVATIVES DEVELOPMENTS ............................... 7 GLOSSARY OF FREQUENTLY USED TERMS ............ 12 Sidley Derivatives | Q2 2017 • 2 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Grants CPO Exemptive Relief from Annual Audited Financial Statement Requirement with Respect to a Terminated Pool On March 22, 2017, the CFTC’s DSIO published Exemption Letter 17-20 granting relief to a CPO from the Rule 4.7(b)(3) and 4.22(d) requirements that it file with the NFA, and report to all pool participants, an annual audited financial statement with respect to a pool that permanently ceased operations just one month into the 2017 calendar year. The relief granted is conditioned on the CPO distributing to all pool participants, and filing with the NFA, a combined audited financial statement covering 2016 and the pool’s one-month period of operation in 2017. In granting the relief, the DSIO acknowledged that requiring a separate audited financial statement for the 2017 stub period would be contrary to the interests of the pool’s participants because of the substantial cost to the pool. A copy of Exemption Letter 17-20 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/17-20.pdf. CFTC Grants Relief from CPO Registration to University Management Company and Fund Directors On April 4, 2017, the CFTC’s DSIO published No-Action Letter 17-19 granting relief from CPO registration (i) to a university management company that operates and invests the assets of various funds that support a university; and (ii) to the directors of the funds. These funds, directly or indirectly, invest in third-party managed pooled investment vehicles and accounts, some of which may invest in commodity interests, thereby potentially rendering the funds commodity pools and, absent this relief, necessitating the funds’ manager and/or directors registering, or claiming an exemption from registering, as a CPO. The DSIO’s grant of relief is conditioned on the funds restricting participation to “supporting organizations” under Internal Revenue Code Section 509(a)(3) or to foundations, associations, corporations, limited liability companies, partnerships or other non-profit entities that were established by officers of the university, are controlled by the university, raise funds in the name of the university and have a primary purpose of providing services or conducting activities in furtherance of the university’s mission pursuant to an agreement with the university. Additionally, the relief is conditioned on the funds receiving commodity trading advice, if any, only from third-party investment advisers that are registered with the CFTC as CTAs or are exempt or excluded from such registration. A copy of No-Action Letter 17-19 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/17-19.pdf. CFTC Extends Time Limited No-Action Position for Swap Dealers Complying with EU Uncleared Swap Margin Requirements On April 18, 2017, the CFTC’s DSIO published No-Action Letter 17-22, extending the relief provided by No-Action Letter 17-05 for the period of February 4, 2017 to May 7, 2017 with respect to CFTC-registered swap dealers who are also subject to the EU’s uncleared swap margin requirements (EMIR RTS). The purpose of the relief initially provided in Letter 17-22 was to give the CFTC time to review and issue a substituted compliance determination with respect to the EMIR RTS. The DSIO states in Letter 17-22 that it will extend the relief provided in Letter 17-05 until November 7, 2017, and that it expects the CFTC to complete its work on the substituted compliance determination by then. A copy of No-Action Letter 17-22 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/17-22.pdf. A copy of No-Action Letter 17-05 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/17-05.pdf. Sidley Derivatives | Q2 2017 • 3 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Adopts Amendments to Rules Governing Annual and Periodic CPO Reports On April 20, 2017, the CFTC’s DSIO published Exemption Letter 17-24 permitting CTAs to use third-party recordkeepers to maintain certain records relating to CTAs and their clients, notwithstanding that CFTC Regulations 4.33 and 4.7(b) require CTAs to maintain such records at their main business office. The relief permits CTAs to use third-party recordkeepers in substantially the same way that CPOs have used such recordkeepers since 2013. In order for a CTA to claim the relief allowing it to use third-party recordkeepers, it must file a notice of claim with the DSIO satisfying the conditions set forth in Letter 17-24. Separately, the CTA must then notify the NFA of the filing. NFA Notice to Members I-17-II provides CTAs with detailed instructions for submitting such notice through the NFA’s Exemptions System. A copy of Exemption Letter 17-24 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/17-24.pdf. A copy of NFA Notice to Members I-17-II is available at: https://www.nfa.futures.org/news/ newsNotice.asp?ArticleID=4821. CFTC Issues Guidance on the Calculation of SEF and DCM Projected Operating Costs On April 28, 2017, the CFTC’s DMO published guidance on the calculation by SEFs and DCMs (Regulated Markets) of their projected operating costs (Guidance), which must be calculated on a quarterly basis to ensure that the Regulated Markets have adequate financial resources under the CEA and CFTC regulations. The Guidance generally provides that a reasonable calculation of projected operating costs must include all expenses necessary for a Regulated Market to discharge its responsibilities. However, the DMO recognized that certain expenses may be appropriately excluded from such calculation, including: certain marketing expenses, compensation for employees without compliance responsibilities, certain intellectual property costs, media subscriptions, tax/audit costs and certain commissions applicable only to brokers at a voice-based SEF. The Guidance also sets forth requirements for Regulated Markets that wish to pro-rate expenses that are only partially attributable to the operation of the SEF or DCM in compliance with the CEA (such as rent for office space shared by compliance personnel with sales and marketing personnel). A copy of the Guidance is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/ documents/letter/17-25.pdf. CFTC Project KISS Taskforce Seeks Public Comment On May 3, 2017, the CFTC voted to seek public comment on ways to simplify and modernize existing CFTC rules pursuant to an agency-wide internal review initiative called Project KISS (an acronym for “Keep it Simple, Stupid”). Acting CFTC Chairman J. Christopher Giancarlo announced Project KISS as an undertaking by the CFTC to implement Executive Order 13777, issued by President Trump on February 24, 2017, directing certain federal agencies to reduce regulatory burdens. As cautioned by Chairman Giancarlo, it is not the CFTC’s intention for Project KISS to result in the repeal or rewrite of existing rules. Rather, members of the public are encouraged to submit recommendations that identify unnecessary complexity and costs associated with the administration of existing rules as these rules are currently written. Suggestions must be received on or before September 30, 2017. A copy of the CFTC press release is available at: http://www.cftc.gov/PressRoom/ PressReleases/pr7555-17. Sidley Derivatives | Q2 2017 • 4 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Launches FinTech Initiative On May 17, 2017, the CFTC approved the creation of LabCFTC, a new initiative to (i) promote FinTech innovation and fair competition by making the CFTC more accessible to FinTech innovators; and (ii) serve as a platform to inform the CFTC’s understanding of new technologies. LabCFTC also will be a source of information to the CFTC on responsible innovation, which may influence the CFTC’s development of new policies. Core LabCFTC components include “GuidePoint” and “CFTC 2.0.” GuidePoint is a dedicated point of contact for FinTech innovators to engage with the CFTC, learn about the CFTC’s regulatory framework, and obtain general information and individual feedback on the implementation of innovative technology ideas for the market. CFTC 2.0 is an initiative to foster the adoption of new technology within the CFTC through collaboration with the FinTech industry and market participants. A copy of the CFTC press release announcing the launch of this new initiative is available at: http://www.cftc.gov/PressRoom/PressReleases/pr7558-17. CFTC Strengthens Protections for Whistleblowers On May 22, 2017, the CFTC approved amendments to Part 165 of the CFTC’s regulations, governing the CFTC’s whistleblower rules. The amendments are intended primarily to strengthen the CFTC’s anti-retaliation protections for whistleblowers by (i) giving the CFTC the authority to commence an enforcement action against an employer that retaliates against a whistleblower; and (ii) prohibiting employers from impeding a whistleblower from communicating with the CFTC through the use of non-disclosure agreements. These amendments are based on a reinterpretation by the CFTC of its anti-retaliation authority under the CEA. In addition, the new amendments are intended to harmonize the CFTC’s rules with those of the SEC’s whistleblower program. A copy of Part 165 of the CFTC’s regulations and the Federal Register notice regarding the approved amendments is available at: http://www.cftc.gov/idc/groups/public/@ lrfederalregister/documents/file/2017-10801a.pdf. FIA Updates FCM Risk Disclosure Booklet On May 24, 2017, the Futures Industry Association (FIA) Law and Compliance Division issued an updated version of the FIA Uniform Futures and Options on Futures Risk Disclosures (FIA Risk Disclosure Booklet). The FIA Disclosure Booklet is provided as a resource for FCMs that are required to deliver certain disclosures to their futures and options on futures customers under CFTC and exchange rules. The FIA Risk Disclosure Booklet was last published in 2007. A copy of the FIA Risk Disclosure Booklet is available at: https://www.fiadocumentation. org/fia/regulatory-disclosures_1/fia-uniform-futures-and-options-on-futures-risk-disclosuremay-20171_1. NFA Submits Proposed Interpretive Notice on Swap Valuation Dispute Filing Requirements of Swap Dealers and Major Swap Participants On May 25, 2017, the NFA submitted to the CFTC a Proposed Interpretive Notice (Proposed Notice) on NFA Compliance Rule 2-49 with respect to the swap valuation dispute filing requirements of swap dealers and MSPs under CFTC Regulation 23.502(c) (Dispute Notice Regulation). Under a CFTC Order dated January 21, 2016, the NFA has been receiving, since March 1, 2016, notices under the Dispute Notice Regulation as a reviewer and custodian. The Proposed Notice is designed to clarify and standardize the required information in these notices and better organize the process. Sidley Derivatives | Q2 2017 • 5 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA Under the Proposed Notice, swap dealers and MSPs are required to electronically submit notices of reportable swap valuation disputes using an NFA form. While the data to be provided on this form is not specified in the Proposed Notice, the NFA indicates that a notice of the required data will be provided to swap dealers and MSPs well in advance of the effective date of the Proposed Notice. The Proposed Notice also specifies disputes that must be reported, which include disputes relating to collateral (regardless of whether collateral is required by CFTC regulation), as well as other valuation disputes. In addition, the Proposed Notice provides direction on how changes in disputed amount, termination of disputes and errors are to be handled. A copy of the Proposed Notice is available at: http://www.nfa.futures.org/news/PDF/CFTC/ interpnotccr2-49swapvaluationdisputefilingrequirements1.pdf. A copy of the Dispute Notice Regulation is available at: https://www.ecfr.gov/cgi-bin/text-idx?SI D=a056f31b0f7e78b712ff95bbc49278e2&mc=true&node=se17.1.23_1502&rgn=div8. CFTC Extends No-Action Relief Previously Provided to SEFs and DCMs for Swaps with Clerical or Operational Errors On May 30, 2017, the CFTC’s DMO and DCR (Divisions) extended previously granted relief with respect to swaps that are rejected from clearing, and thus are deemed to be void ab initio pursuant to CFTC rules, due to readily correctible clerical or operational errors (Rejected Swaps), or where such an error is discovered after a swap has been cleared (Error Swaps). CFTC No-Action Letter 17-27 extends relief provided in CFTC No-Action Letter 16-58 to SEFs and DCMs from CFTC regulations requiring swaps to be executed through an order book or request for quote system and from the prohibition on pre-arranged trading if (i) a Rejected Swap is corrected and resubmitted for clearing via a pre-arranged trade with terms and conditions that match the original trade, other than the clerical or operational error; or (ii) an Error Swap is offset by a pre-arranged offsetting trade and corrected by a pre-arranged trade that corrects the clerical or operational error in the original trade. The relief is subject to the conditions described in Letter 17-27 and expires upon the effective date of revised CFTC regulations that establish permanent solutions for SEF-executed Rejected Swaps and Error Swaps. A copy of No-Action Letter 17-27 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/17-27.pdf. A copy of No-Action Letter 16-58 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-58.pdf. Giancarlo Confirmation Hearing On June 29, 2017, the Senate Committee on Agriculture, Nutrition and Forestry voted 16-5 to approve the nomination of acting CFTC Chairman Christopher Giancarlo to be the permanent Chairman of the CFTC. Chairman Giancarlo was one of three CFTC Commissioners nominated to the CFTC by President Obama in 2013 and originally was confirmed by unanimous consent of the Senate in June 2014. Chairman Giancarlo is serving as Commissioner for a term expiring in April 2019. Quintenz and Stump Nominated as CFTC Commissioners; Bowen to Resign On May 12, 2017, President Trump nominated Brian Quintenz (a Republican) to serve as a CFTC Commissioner. On June 9, 2017, President Trump nominated Dawn DeBerry Stump (also Republican) to serve as a CFTC Commissioner. Mr. Quintenz is the founder and former Sidley Derivatives | Q2 2017 • 6 Sidley Derivatives QUARTERLY European Derivatives managing principal of Saeculum Capital Management LLC and former senior policy aide to Congresswoman Deborah Pryce. Ms. Stump is a former vice president at NYSE Euronext. If confirmed by the Senate, Mr. Quintenz and Ms. Stump would serve terms expiring April 13, 2020 and April 13, 2022, respectively. President Obama previously nominated Mr. Quintenz to serve as a CFTC Commissioner, but the Senate did not confirm him prior to the end of the 114th Congress in January 2017. Confirmation hearings have not yet been scheduled. Additionally, on June 20, 2017, current CFTC Commissioner Sharon Bowen (a Democrat) indicated that she will soon resign in hopes of causing President Trump and the U.S. Senate to nominate and confirm additional CFTC Commissioners. Only acting CFTC Chairman Christopher Giancarlo and Ms. Bowen currently serve as CFTC Commissioners, pending Senate action on Mr. Quintenz and Ms. Stump. Commissioner Bowen cited “intolerable” gridlock created by Commissioner vacancies as the reason for her upcoming departure. Commissioner Bowen indicated that she intends to leave the CFTC within the next few months, or sooner if another nominee is confirmed. CFTC Names Chief Market Intelligence Officer On April 3, 2017, the CFTC named Andrew B. Busch as its first Chief Market Intelligence Officer. The Market Intelligence Unit, which was created by the CFTC in March 2017, is designed to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends, including the impact of new technologies and trading methodologies. The new Chief Market Intelligence Officer assumed his duties on April 10, 2017. A copy of the CFTC press release announcing the appointment is available at: http://www.cftc. gov/PressRoom/PressReleases/pr7543-17. Proposed Amendments to EMIR On May 4, 2017 and June 13, 2017, respectively, the EC published two separate sets of proposed amendments to EMIR. The first set are generally aimed at enhancing proportionality of the clearing, collateral and reporting requirements, providing further relief to non-financial counterparties, including an exemption from reporting, and introducing a threshold below which smaller financial counterparties would not be required to centrally clear. However, a general expansion of the definition of a financial counterparty is causing concern as securitization vehicles and additional types of funds would be brought into scope. Other notable changes include the requirement for clearing services to be provided under fair, reasonable and non-discriminatory commercial terms. The second set of amendments relate to the supervision of EU and non-EU CCPs, granting enhanced supervisory powers to ESMA and introducing a regime to adapt the level of requirements applicable to non-EU CCPs operating in the EU, based on how systemically important they are considered to be. Under the proposals, a so-called substantially systemically important CCP clearing EUR denominated products would be required to base itself in the EU. Both proposals will now be negotiated among the EU member states and the European Parliament. A copy of the proposed amendments is available at: https://ec.europa.eu/info/law/derivativesemir-regulation-eu-no-648-2012/upcoming_en. EUROPEAN DERIVATIVES DEVELOPMENTS Sidley Derivatives | Q2 2017 • 7 Sidley Derivatives QUARTERLY Asia Derivatives Extension to Transitional Period Applying to CCP Capital Requirements On June 6, 2017, the EC published in the Official Journal of the European Union an implementing act further extending the transitional period currently governing increased capital requirements for non-qualifying CCP exposures under the EU Capital Requirements Regulation (CRR) by six months. As a result, the transitional period will now run until December 15, 2017. The extension means that members of EU banking groups can continue to retain exposures to non-EU CCPs which have not yet gained recognition under EMIR, without the EU banking group being subject to the higher capital requirements contemplated under the CRR. Notably, the EC has not yet made the “equivalence” determination necessary for U.S. CCPs regulated by the SEC to become validly recognized for the purposes of the CRR. This is the seventh time that the EC has used this extension power. A copy of the implementing act is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32017R0954&from=EN. ESMA Consultation Paper on Trading Obligation On June 19, 2017, ESMA published a consultation paper and draft Regulatory Technical Standards (RTS) setting out the classes of derivatives that it proposes to be subject to trading obligations. The EU Markets in Financial Instruments Directive (MiFID II) regime requires certain counterparties to trade in-scope derivative contracts on specified trading venues. Once a class of derivatives has been declared subject to the clearing obligation under EMIR, ESMA must determine if that class should also be made subject to the trading obligation and submit draft RTS to the EC specifying those derivatives, which the EC may then adopt and bring into force. The proposed class of derivatives must be admitted to trading or traded on at least one specified trading venue and must be considered sufficiently liquid to trade only on the specified venues. The classes of derivatives that ESMA is proposing to be subject to the trading obligation at this stage are certain fixed-to-float interest rate swaps in EUR, GBP and USD and iTraxx Europe Main and iTraxx Europe Crossover as of series 17. This is a notably narrower set of products than are subject to CFTC MAT determinations in the United States. Following consultation, ESMA will finalize the draft RTS and submit them to the EC for adoption. A copy of the consultation paper is available at: https://www.esma.europa.eu/sites/default/files/ library/esma70-156-71_cp_trading_obligation.pdf. Hong Kong Securities and Futures Commission of Hong Kong Enhances Position Limit Regime On May 22, 2017, following a six month consultation period, the Securities and Futures Commission of Hong Kong (SFC) announced that enhancements to the position limit regime which became effective on June 1, 2017, the same day that amendments to the Securities and Futures (Contracts Limits and Reportable Positions) Rules commenced. The key features of the enhanced regime include: ■ Three-tier framework to address de facto single position limit issue: A contract equivalent number will be calculated for each stock option class based on the underlying stock’s market capitalization and liquidity, and other factors. Each stock option class will be assigned to one of three tiers comprising limits of 50,000, 100,000 and 150,000 contracts based on the contract equivalent number; ASIA DERIVATIVES DEVELOPMENTS Sidley Derivatives | Q2 2017 • 8 Sidley Derivatives QUARTERLY ■ Regularly scheduled reviews: The position limits for all stock option classes will be reviewed annually and adjusted when necessary to ensure they remain aligned with the market’s development; and ■ Adjustments for corporate actions: Following a corporate action such as a share split or consolidation that affects the underlying stock, the contract size of the affected stock option may be adjusted to maintain the notional value of the contract. The SFC anticipates that the enhancements to the position limit regime will improve the competitiveness of Hong Kong’s derivatives market as an international finance center. Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/newsand-announcements/news/doc?refNo=17PR70; http://www.sfc.hk/edistributionWeb/gateway/ EN/news-and-announcements/news/doc?refNo=17PR38; http://www.hkex.com.hk/eng/ newsconsul/hkexnews/2017/170523news.htm; and http://www.sfc.hk/edistributionWeb/ gateway/EN/consultation/conclusion?refNo=16CP3. Hong Kong Monetary Authority and SFC Release Conclusions on the OTC Derivatives Regulatory Regime On June 27, 2017, the Hong Kong Monetary Authority (HKMA) and the SFC published their conclusions to a joint consultation that was launched in relation to adjusting the scope of “OTC derivative products” under the OTC derivatives regime. The HKMA’s and the SFC’s conclusions were that: ■ products traded on and cleared through certain additional markets and clearing houses prescribed under section 392A of the Securities and Futures Ordinance (SFO) do not constitute “OTC derivative products” and hence should not be subject to the Securities and Futures (OTC Derivatives Transactions – Reporting and Record Keeping Obligations) Rules; and ■ Delta One Warrants bearing certain features are covered under section 392(1)(b)(vii) of the SFO and should be excluded from the definition of “OTC derivative product” by virtue of section 1B(2)(i) of Part 1 of Schedule 1 to the SFO. The timetable for the implementation of the above two changes is uncertain at this stage, but the HKMA and the SFC expect that implementation to limit the scope of the definition of OTC derivative product may be possible in Q4 2017. Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-andannouncements/news/doc?refNo=17PR90; and http://www.sfc.hk/web/EN/files/SOM/OTC/ Joint%20consultation%20conclusions%20on%20the%20prescription%20of%20additional%20 markets%20and%20clearing%20houses%20and%20the%20prescription%20of%20Delta%20 -%20Final.pdf. SFC Launches Consultation on New Open-Ended Fund Company Rules and Code On June 28, 2017, the SFC launched a two-month consultation on the legal and regulatory requirements applicable to the new Open-Ended Funding Company (OFC) structure in which all OFCs will be required to be registered with the SFC. All OFCs will be governed by the proposed Securities and Futures Rules (OFC Rules) and Code (OFC Code). The proposed OFC Rules will set out, among other matters, the detailed statutory requirements concerning company formation and maintenance, the required key operators of the OFC, the segregated liability feature for umbrella and sub-fund structures, the mechanism for Asia Derivatives Sidley Derivatives | Q2 2017 • 9 Sidley Derivatives QUARTERLY disqualification of directors and the winding-up processes. The proposed OFC Code will also contain a set of general principles with which all OFCs and their key operators are expected to comply in the management and operation of OFCs. The SFC anticipates that the OFC Rules and OFC Code will become effective in 2018. Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-andannouncements/news/doc?refNo=17PR88; and http://www.sfc.hk/edistributionWeb/gateway/ EN/consultation/openFile?refNo=17CP5. Bond Connect Between Hong Kong and Mainland China Successfully Launched On July 3, 2017, the Hong Kong Exchanges and Clearing Limited (HKEX) and China Foreign Exchange Trade System (CFETS) announced the launch of a mutual market access program between Hong Kong and Mainland China (Bond Connect). Bond Connect allows investors in the Hong Kong market to trade bonds in the Mainland China Market and vice versa. The launch of the Bond Connect also marked the commencement of Bond Connect Company Limited, a joint venture between CFETS and HKEX that supports trading services, investor education and other services related to Bond Connect. Foreign investors will now be able to access the China Interbank Bond Market conveniently through a single link involving both Mainland China and Hong Kong financial institutions that are now eligible to trade eligible Renminbi-denominated bonds (e.g., government bonds, financial bonds and corporate bonds). Further information is available at: http://www.hkex.com.hk/eng/newsconsul/ hkexnews/2017/1705162news.htm; and https://www.hkex.com.hk/eng/newsconsul/ hkexnews/2017/170703news.htm. China Shanghai Futures Exchange Releases Rules and Regulations Applicable to Crude Oil Futures On May 11, 2017, the Shanghai International Energy Exchange (INE), a subsidiary of the Shanghai Futures Exchange, officially released the INE Articles of Associations and INE General Exchange Rules, as well as 11 detailed rules and regulations pertaining to the proposed crude oil futures (Rules and Regulations). Crude oil is the first special product approved by the China Securities Regulatory Commission to be traded by international traders and brokerage firms. The Rules and Regulations released by INE include the Management Rules for Overseas Special Participants, which specify the rights, obligations and qualification requirements for overseas participants. Crude oil futures are expected to launch within this year. Further information is available at: http://www.shfe.com.cn/en/AnnouncementandNews/ SHFEAnnouncement/911327625.html. China Releases Guidelines for Trading of the OTC Derivatives and the Standard Form OTC Derivatives Contract in the Inter-Agency Quotation and Service System for Privately Offered Products On May 12, 2017, the China Securities Inter-agency Quotation System Co., Ltd., with the consent of the Securities Association of China, released the Guidelines for the OTC Derivatives Trading in the Inter-agency Quotation and Service System for Privately Offered Products (for Asia Derivatives Sidley Derivatives | Q2 2017 • 10 Sidley Derivatives QUARTERLY Asia Derivatives Trial Implementation) (Guidelines for OTC Derivatives Trading), together with the Guidelines for the Standard Form OTC Derivatives Contract Trading in the Inter-agency Quotation and Service System for Privately Offered Products (for Trial Implementation) (Guidelines for Standard Form OTC Derivatives Contract Trading, and together with the Guidelines for OTC Derivatives Trading, the Guidelines). The Guidelines are intended to regulate OTC derivatives trading in the inter-agency quotation and service system for privately offered products (Quotation System), as well as to prevent systemic market risk. Specifically, the Guidelines for OTC Derivatives Trading elaborate on the types of OTC derivatives that are eligible for trading while also providing a regulatory framework for the execution of trading related agreements, price inquiry and quotation, and liquidation and settlement of OTC derivatives trading in the Quotation System. The Guidelines for Standard Form OTC Derivatives Contract Trading specify (i) the trading mechanism applicable to professional dealers and the types of eligible standard form OTC derivatives contracts; and (ii) the procedures for liquidation and risk management of standard form OTC derivatives contracts traded in the Quotation System. Further information is available at: http://www.sac.net.cn/tzgg/201705/t20170516_131371.html; and http://www.interotc.com.cn/xxpl/smInfomationContant.co?bdid=9199. The Shanghai Stock Exchange Releases Guidance of Investor Suitability Management for Pilot Program of Stock Option On June 28, 2017, the Shanghai Stock Exchange (SSE) released the SSE Guidance of Investor Suitability Management for Pilot Program of Stock Option (Guidance), which subsequently came into force on July 1, 2017. The Guidance aims to promote market growth by protecting investors’ legitimate rights and interest in accordance with the Administrative Measures on Securities and Futures Investors’ Suitability issued by the China Securities Regulatory Commission, which also came into force on July 1, 2017. The Guidance stipulates, among other conditions, that both individual and institutional investors should meet the average daily asset condition requirement for at least 20 trading days before applying to open an account for stock option trading. Further information is available at: http://english.sse.com.cn/aboutsse/news/ newsrelease/c/4338535.shtml. Singapore Monetary Authority of Singapore Issues Consultation Papers on Draft Regulations Pursuant to the Securities and Futures Act On January 9, 2017, the Singapore parliament passed the Securities and Futures Act 2017 (Amendment Act). The Amendment Act sets out various amendments to the Securities and Futures Act (SFA), including the introduction of a new licensing requirement for persons who deal in OTC derivatives. The effective date for the Amendment Act has not been published yet. Given the wide-ranging proposed amendments to the SFA, the Monetary Authority of Singapore (MAS) is consulting on related draft regulations in two phases and as a part of this process, issued two consultation papers on draft regulations pursuant to the SFA, in April and May 2017, respectively (Consultation Papers). Both the Consultation Papers are now closed for submissions. A key amendment proposed by the April 2017 Consultation Paper pertains to Securities and Futures (Markets) Regulations. This amendment would provide for the repeal and reissue of the existing Securities and Futures (Markets) Regulations, to operationalize Part II of the SFA, which Sidley Derivatives | Q2 2017 • 11 Sidley Derivatives QUARTERLY Asia Derivatives provides for the regulation of approved exchanges (AE) and recognized market operators (RMO) in Singapore. The MAS has reiterated that it is not its intention to regulate as AEs or RMOs, entities that facilitate the transactions of OTC derivatives in a way that is more akin to market intermediation as opposed to that of operating an organized market. The MAS also clarified that facilities which engage with customers to broker “block futures” or “negotiated large trades” for the purposes of registering such trades on an established organized market operated by an AE or RMO (whether foreign or local), are considered to be providing intermediation services in relation to exchange-traded derivatives. Key amendments from the May 2017 Consultation Paper pertain to Securities and Futures (Licensing and Conduct of Business) Regulations. Amendments to the Securities and Futures (Licensing and Conduct of Business) Regulations introduce certain business conduct requirements for intermediaries dealing in OTC derivatives contracts, as well as licensing exemptions, including exemptions for persons who deal in OTC derivatives: ■ for their own account or an account belonging to and maintained wholly for the benefit of a related corporation, and with another related corporation; ■ in which the underlying asset is a commodity, with institutional, accredited investors or expert investors; ■ for their own account or an account belonging to and maintained wholly for the benefit of a related corporation, with a regulated financial institution, and do not receive a spread or other remuneration in return; and ■ only with accredited investors, expert investors, or institutional investors, do not book any customer positions in OTC derivatives, do not handle or hold any customer monies or assets, are not a party to any OTC derivatives contract and are registered with the MAS as a registered OTC derivatives broker (such registered brokers will be subject to certain ongoing compliance requirements). Copies of the Consultation Papers are available at: http://www.mas.gov.sg/~/media/MAS/ News%20and%20Publications/Consultation%20Papers/Consultation%20Paper%20I%20on%20 Draft%20Regulations%20Pursuant%20to%20the%20Securities%20and%20Futures%20Act.pdf; and http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20 Papers/Consultation%20Paper%20II%20on%20Draft%20Regulations%20Pursuant%20to%20 the%20Securities%20and%20Futures%20Act.pdf. Sidley Derivatives | Q2 2017 • 12 Sidley Derivatives QUARTERLY Glossary Abbreviation Definition BaFin German Bundesanstalt für Finanzdienstleistungsaufsicht BCBS Basel Committee on Banking Supervision BHC Bank Holding Companies Bundesbank Deutsche Bundesbank CBOT Chicago Board of Trade CCP Central Counterparty CFTC Commodity Futures Trading Commission CEA Commodity Exchange Act CME Chicago Mercantile Exchange, Inc. CPO Commodity Pool Operator CTA Commodity Trading Advisor DCM Designated Contract Market DCO Derivatives Clearing Organization DCR Commodity Futures Trading Commission, Division of Clearing and Risk DMO Commodity Futures Trading Commission, Division of Market Oversight DSIO Commodity Futures Trading Commission, Division of Swap Dealer and Intermediary Oversight Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 DTCC Depository Trust & Clearing Corporation EC European Commission EEMAC Commodity Futures Trading Commission, Energy and Environmental Markets Advisory Committee EMIR European Market Infrastructure Regulation ESMA European Securities Market Authority EU European Union FBO Foreign Banking Organization FCM Futures Commission Merchant FDIC Federal Deposit Insurance Corporation FinCEN U.S. Department of the Treasury, Financial Crimes Enforcement Network FINRA Financial Industry Regulatory Authority, Inc. IB Introducing Broker IHC Intermediate Holding Company IOSCO International Organization of Securities Commissions ISDA International Swaps and Derivatives Association MSP Major Swap Participant GLOSSARY OF FREQUENTLY USED TERMS Sidley Derivatives | Q2 2017 • 13 Sidley Derivatives QUARTERLY Abbreviation Definition NFA National Futures Association RIC Registered Investment Company RTS Regulatory Technical Standards SDR Swap Data Repository SEC Securities and Exchange Commission SEF Swap Execution Facility SIDCO Systemically Important Derivatives Clearing Organization TAC Commodity Futures Trading Commission, Technology Advisory Committee GLOSSARY OF FREQUENTLY-USED TERMS Glossary The content of this publication is for informational purposes only and does not constitute legal advice. This publication is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon the information presented herein without seeking advice from professional advisers. The information included in this publication is provided by individual contributors and does not reflect views of Sidley Austin LLP. Sidley Derivatives | Q2 2017 • 14 Sidley Derivatives QUARTERLY CONTACTS For further information about this newsletter and our practice, please contact: FOR U.S. DEVELOPMENTS Geoffrey F. Aronow Partner +1 202 736 8023 [email protected] Andrew P. Blake Partner +1 202 736 8977 [email protected] Nathan A. Howell Partner +1 312 853 2655 [email protected] Kenneth A. Kopelman Partner +1 212 839 5834 [email protected] Michele Navazio Partner +1 212 839 5310 [email protected] William J. Nissen Partner +1 312 853 7742 [email protected] Ellen P. Pesch Partner +1 212 839 5569 [email protected] Robert J. Robinson Partner +1 212 839 5762 [email protected] Michele Ilene Ruiz Partner +1 312 853 7187 [email protected] Elizabeth M. 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