On October 11, 2016, the CFTC proposed rules (Proposed Cross-Border Rules) that address the cross-border application of certain of the CFTC’s swaps rules. The Proposed Cross-Border Rules, if adopted, would supersede, in certain respects, the cross-border interpretive guidance that the CFTC originally published in 2013 (Cross-Border Guidance), which set forth the CFTC’s initial approach to the cross-border application of its swaps rules. The Proposed Cross-Border Rule would extend the cross-border application of the CFTC’s swap rules in some ways, but would limit it in others, and would generally reinforce the approach that the CFTC took earlier this year when it adopted its final rules for the cross-border application of margin requirements for non-cleared swaps (Cross-Border Margin Rules). Rather than following the Cross-Border Guidance, the Proposed Cross-Border Rules define “U.S. person” in the same manner that the Cross-Border Margin Rules defines this term. The Proposed Cross-Border Rules also include a definition for “foreign consolidated subsidiary” similar to the Cross-Border Margin Rules. The Proposed Cross-Border Rules would apply the new definitions (and certain other concepts) in two areas: registration thresholds for swap dealers and external business conduct standards for non-U.S. swap dealers. However, the preamble accompanying the Proposed Cross-Border Rules suggests that the new definitions and supporting concepts may have a broader application in the future as the CFTC more generally revisits the subject of the cross-border application of its swaps rules. For example, the CFTC indicated that it might apply the new definitions and supporting concepts when it considers whether transaction-level requirements (such as the swap clearing requirement) should apply when a non-U.S. swap dealer transacts with a non-U.S. person in a swap that is “arranged, negotiated or executed” by personnel in the United States. Further information is included in the Sidley Update referenced below. A copy of the Proposed Cross-Border Rules is available at: http://www.cftc. gov/idc/groups/public/@lrfederalregister/documents/file/2016-24905a.pdf. A copy of the prior Sidley Update discussing the Proposed CrossBorder Rules is available at: http://www.sidley.com/~/media/updatepdfs/2016/11/20161109-derivatives-update.pdf. U.S. DERIVATIVES DEVELOPMENTS CFTC and NFA .............................. 1 SEC and FINRA ............................10 U.S. ENFORCEMENT DEVELOPMENTS ............................. 12 EUROPEAN DERIVATIVES DEVELOPMENTS ............................. 14 ASIA DERIVATIVES DEVELOPMENTS ............................. 15 GLOSSARY OF FREQUENTLY USED TERMS ............ 19 Sidley Derivatives | Q4 2016 • 2 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Issues Supplemental Proposal on Regulation AT On November 4, 2016, the CFTC supplemented its original November 2015 proposal to regulate automated trading in the futures markets (Supplemental Proposal). The Supplemental Proposal, among other things, introduces a volume threshold test for determining whether a person comes within the scope of Regulation AT, proposes to establish pre-trade risk controls at two, rather than three, levels and would narrow the circumstances under which the CFTC staff could access source code. The Supplemental Proposal also would expand certain aspects of the proposed rule to cover all electronic trading, not merely algorithmic trading. Further information is included in the Sidley Update referenced below. The comment period for the Supplemental Proposal was extended by the CFTC on January 23, 2017 to May 1, 2017. A copy of the Supplemental Proposal is available at: http://www.cftc.gov/idc/groups/public/@ newsroom/documents/file/federalregister110416.pdf. The Sidley Update relating to the Supplemental Proposal is available at: http://www.sidley.com/ en/news/2016-11-22-investment-funds-update. CFTC Approves Order Postponing Automatic Reduction of the De Minimis Exception to Swap Dealer Registration On October 13, 2016, the CFTC postponed implementation of the automatic decrease in the swap dealer de minimis threshold to December 31, 2018 to give the CFTC additional time to consider the structure and level of the threshold. Market participants that exceed US$8 billion in gross notional swap dealing activity over a rolling 12-month period are required to register with the CFTC as swap dealers during a phase-in period that originally was to end on December 31, 2017. This action by the CFTC extends the phase-in period for another year. When the phase-in period ends, the threshold will be decreased automatically to US$3 billion unless the CFTC acts to establish a different threshold. The extension follows the CFTC staff’s final report, issued on August 15, 2016 as directed by CFTC Regulation 1.3(ggg)(4)(ii)(B), on various aspects of the de minimis threshold. The staff report considered the swap data available to the CFTC in light of the current US$8 billion de minimis threshold, the potential effects of raising or lowering the threshold, and several possible alternatives to the current de minimis exception, including: (i) a notional de minimis threshold specific to each asset class; (ii) a multi-factor approach that would potentially include counterparty count and/or transaction count metrics in the de minimis exception, in addition to a gross notional dealing threshold; (iii) a multi-tiered approach where the regulatory requirements associated with swap dealer registration are commensurate with an entity’s level of dealing activity; and (iv) the exclusion from an entity’s de minimis calculation of swaps that are traded on a registered or exempted SEF or DCM and/or cleared. After reviewing the final report, the CFTC determined that it needed more time to consider the structure and level of the de minimis threshold, and the extension of the phase-in period reflects such determination. A copy of the CFTC order extending the date for the automatic decrease in the de minimis threshold is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/ file/2016-25143a.pdf. CFTC Issues Final Order Exempting Certain Transactions of Southwest Power Pool, Inc. and Amending the March 2013 Final Order Related to Other RTOs and ISOs On October 18, 2016, in response to an application (SPP Application) from Southwest Power Pool, Inc. (SPP), a regional transmission organization (RTO) regulated by the Federal Energy Regulatory Commission (FERC), the CFTC issued a final order (SPP Final Order) that exempted certain transactions entered into by SPP from certain provisions of the CEA other than the Sidley Derivatives | Q4 2016 • 3 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC’s general anti-fraud, anti-manipulation authority and scienter-based prohibitions (Non-Excluded Regulations). Subject to certain conditions, the SPP Final Order exempts contracts, agreements and transactions that are offered or entered into in a market administered by SPP pursuant to SPP’s FERC-approved tariff, rate schedule or protocol (Covered Transactions). SPP may only enter into Covered Transactions with counterparties that qualify as “appropriate persons” or “eligible contract participants” as defined in the CEA and CFTC Regulations or that are in the business of generating, transmitting or distributing electric energy or providing energy services that are necessary to support the reliable operation of the transmission system. The SPP Final Order also amends relief previously granted to six other RTOs and independent system operators (ISOs) (Covered RTOs and ISOs) on March 18, 2013 (the 2013 Final Order). Following the 2013 Final Order, the CFTC proposed an amendment to the 2013 Final Order that, if adopted, would allow private litigants to sue certain RTOs and ISOs for violations of the CEA and CFTC Regulations, including the Non-Excluded Regulations. The CFTC reversed course in the SPP Final Order by amending the 2013 Final Order to exempt Covered RTOs and ISOs from private actions related to the Non-Excluded Regulations and also extending this exemption to SPP. A copy of the SPP Final Order is available at: http://www.cftc.gov/idc/groups/public/@ lrfederalregister/documents/file/2016-25571a.pdf. CFTC and Financial Conduct Authority (UK) Sign MOU Regarding Supervision of Cross-Border Regulated Entities On October 6, 2016, the CFTC signed a Memorandum of Understanding (MOU) with the Financial Conduct Authority (FCA) of the United Kingdom. The MOU provides for the cooperation and exchange of information between the CFTC and the FCA with respect to the supervision of entities regulated by both the CFTC and the FCA. The CFTC and the FCA anticipate that they will primarily cooperate through informal consultations, formal cooperation and the exchange of non-public information. A copy of the MOU can be found at: http://www.cftc.gov/idc/groups/public/@ internationalaffairs/documents/file/cftc-fca-supervisorymou100616.pdf. CFTC and Additional Canadian Regulators Sign MOU Regarding Supervision of Cross-Border Regulated Entities On November 1, 2016, the CFTC signed an additional counterpart to a 2014 Memorandum of Understanding (MOU), previously executed with the regulatory authorities of the Canadian provinces of Alberta, British Columbia, New Brunswick, Manitoba, the Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan and Yukon. The counterpart adds the Canadian provinces of Newfoundland and Labrador. The MOU provides for the cooperation and exchange of information between the CFTC and the Canadian regulators with respect to the supervision of entities regulated by both the CFTC and the Canadian regulators. The CFTC and the Canadian regulators anticipate that they will primarily cooperate through informal consultations, formal cooperation and the exchange of non-public information. A copy of the counterpart with respect to Newfoundland and Labrador can be found at: http://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-snlsupervisorymou110116.pdf. Sidley Derivatives | Q4 2016 • 4 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Grants FBOT Registration to Five Foreign Entities On October 31, 2016, the CFTC approved the registrations of the following Foreign Boards of Trade (FBOT): (i) Eurex Deutschland (Eurex); (ii) CME Europe Limited (CMEEL); (iii) ICE Futures Europe (IFE); (iv) London Metal Exchange (LME); and (v) London Stock Exchange plc. As a result of these FBOT registrations, each of the FBOTs is now permitted to provide identified members or other participants located in the United States with direct access to its electronic order entry and trade matching system. Eurex, IFE and LME previously offered direct access to U.S. participants in accordance with prior no-action letters issued by the CFTC. Pursuant to CFTC regulation 48.6, adopted in 2011 to replace the no-action letter form of relief, these no-action letters are automatically withdrawn upon the issuance of the FBOT registrations for Eurex, IFE and LME. CFTC Amends Timing Requirement for Futures Commission Merchant, Major Swap Participant and Swap Dealer Chief Compliance Officer Annual Reports On November 10, 2016, the CFTC issued a Final Rule (Final Annual Report Rule) that amended CFTC Regulation 3.3(f) to extend the deadline for registered FCMs, MSPs and Swap Dealers (collectively, Registrants) to deliver their annual chief compliance officer annual reports (CCO Annual Reports) from 60 days to 90 days after a Registrant’s fiscal year end. In circumstances where the CFTC has made a substituted compliance determination in respect of a non-U.S. regulatory regime, affected registered swap dealers and MSPs may elect to file with the CFTC a comparable annual report filed in the respective non-U.S. jurisdiction; they must file their comparable annual report within 15 days of the relevant regulatory regime’s deadline or, if the regime does not specify a deadline, within 90 days of the registered swap dealers’ or MSPs’ fiscal year end. The Final Annual Report Rule also grants to the Director of the DSIO the authority to extend the CCO Annual Report filing deadline. A copy of the Final Annual Report Rule is available at: http://www.cftc.gov/idc/groups/public/@ lrfederalregister/documents/file/2016-27525a.pdf. CFTC Staff Issues Results of Supervisory Stress Tests of Clearinghouses On November 16, 2016, the CFTC announced the results of a stress test it conducted across five of the largest CFTC-registered clearinghouses: CME Clearing, ICE Clear Credit, ICE Clear Europe, ICE Clear U.S. and LCH Clearnet. The purpose of the stress test was to simulate how the clearinghouses would withstand “stressful market conditions” affecting its largest clearing members and determine whether the margin posted by clearing members and the other prefunded financial resources held by the clearinghouses would be sufficient. According to CFTC Chairman Massad, the stress test results revealed that “clearinghouses had ample resources to withstand extremely stressful market scenarios [and…] that risk was diversified across clearing members—a loss at one clearinghouse does not mean losses at all.” It is important to note, however, that the stress test did not address other sources of risk for a clearinghouse (e.g., liquidity risk, operational risk or cyber risk). The CFTC staff report is available at: http://www.cftc.gov/idc/groups/public/@newsroom/ documents/file/cftcstresstest111516.pdf. Sidley Derivatives | Q4 2016 • 5 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Market Risk Advisory Committee Hearing On November 17, 2016, the CFTC’s Market Risk Advisory Committee held a meeting to hear: (i) its CCP Risk Management Subcommittee’s (Subcommittee) final recommendations on how CCPs can further enhance their efforts in preparing for the default of a significant clearing member; and (ii) an official from the Bank of England describe its coordinated CCP default fire drill procedures. An archived video of the meeting is available at: https://www.youtube.com/watch?v=UTnOTOw SYKA&feature=youtu.be. CFTC No-Action Relief from Reporting Requirements under Ownership and Control Final Rule Expired in November 2016 On November 18, 2016, the CFTC’s no-action relief from certain reporting obligations of the CFTC’s ownership and control final rule granted under CFTC Letter 16-32 (OCR Relief) expired. As a result, beginning on November 18, 2016 at 12:00 a.m. U.S. Eastern Time, if requested by the DMO, market participants meeting certain trading thresholds were required to begin submitting, via the CFTC’s web portal or secure file transfer protocol, certain trader identification and market participant data on new and updated reporting forms, including amended Form 40/40S and new Form 71. A copy of the CFTC’s press release discussing the scheduled expiration of the OCR Relief is available at: http://www.cftc.gov/PressRoom/PressReleases/pr7484-16. CFTC Adopts Amendments to Rules Governing Annual and Periodic CPO Reports On November 25, 2016, the CFTC adopted amendments to CFTC Regulations 4.22, 4.7 and 4.27 that generally (i) permit CPOs of commodity pools organized in non-U.S. jurisdictions (Non-U.S. Pools) to use additional generally accepted accounting standards in place of U.S. generally accepted accounting principles (U.S. GAAP) when preparing the pool’s financial statements and any required Form CPO-PQR; and (ii) relieve any CPO of a newly-formed pool from the obligation to have its first annual report audited for short initial “stub” fiscal years. The amendments are intended to codify exemptive relief previously provided by the CFTC on a case-by-case basis to CPOs and became effective on December 27, 2016. CPOs are required to distribute an annual report to pool participants that contains financial statements prepared in accordance with U.S. GAAP or, with respect to Non-U.S. Pools, International Financial Reporting Standards (IFRS), if certain conditions are met. The amendments expand the list of alternative accounting standards beyond IFRS to include the generally accepted accounting standards followed in the UK, Ireland, Luxembourg and Canada. Annual reports are required to be audited by an independent public accountant; prior to the amendments, the requirement applied regardless of how short a period was covered in a pool’s initial fiscal year. Subject to specified conditions, the amendments permit a CPO to deliver an unaudited annual report for an initial fiscal year that is four or fewer months long, measured from the day a pool receives subscriptions from investors that are not “pool insiders,” such as the pool’s CPO, CTA and certain of their relatives and affiliates. The CFTC proposing release is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-08-05/ pdf/2016-18400.pdf. The CFTC adopting release is available at: http://www.cftc.gov/idc/groups/public/@ lrfederalregister/documents/file/2016-28388a.pdf. Sidley Derivatives | Q4 2016 • 6 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC’s DMO Extends Time-Limited No-Action Relief to SEFs from Certain “Block Trade” Requirements in CFTC Regulation 43.2 On October 7, 2016, the CFTC’s DMO issued No-Action Letter 16-74, which extends the relief previously granted to SEFs in No-Action Letters 14-118 and 15-60. As with the prior letters, No-Action Letter 16-74 was issued to allow SEFs to facilitate the execution of block trades that are intended to be cleared and specifically provides relief applicable to those block trades from the requirement under CFTC Regulation 43.2 that a block trade “occur away from” a SEF’s trading system or platform. The relief is subject to a number of conditions and expires on the earlier of November 15, 2017 and the effective date of any CFTC action with respect to the issues discussed therein. A copy of No-Action Letter 16-74 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-74.pdf. CFTC Extends Swap Data Reporting Relief to Certain Non-U.S. Swap Dealers On November 21, 2016, the CFTC’s DMO issued, in response to requests from market participants, a time-limited no-action letter (CFTC Letter 16-79) that extends the swap data reporting relief previously granted to certain non-U.S. swap dealers. Consistent with the prior relief made available under CFTC Letters 13-75, 14-141 and 15-61, CFTC Letter 16-79 provides relief to eligible non-U.S. swap dealers from the requirement to report swap data pursuant to Parts 45 and 46 of the CFTC’s regulations for swaps entered into with non-U.S. counterparties that are not guaranteed affiliates or conduit affiliates (as defined in the CFTC’s July 2013 Cross-Border Guidance). Swap dealers eligible to rely on this relief are those that are: (i) non-U.S. persons established under the laws of Australia, Canada, the EU, Japan or Switzerland; and (ii) not part of an affiliated group in which the ultimate parent entity is a U.S. swap dealer, U.S. bank, U.S. financial holding company or U.S. bank holding company. The relief is provided subject to certain conditions and is set to expire on the earlier of 30 days following the CFTC’s issuance of an applicable substituted compliance determination and December 1, 2017. A copy of CFTC Letter 16-79 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-79.pdf. CFTC Divisions Extend Time-Limited No-Action Relief from the Clearing and Trade Execution Requirements for Certain Affiliated Counterparties On November 28, 2016, the CFTC’s DCR and DMO each extended previously issued no-action relief from the clearing and trade execution requirements for certain inter-affiliate transactions provided in DCR No-Action Letter 15-63 and DMO No-Action Letter 15-62, respectively. CFTC Letter 16-81 extends relief previously granted by CFTC Letter 15-63 permitting eligible affiliate counterparties to continue to rely on the alternative compliance framework provided in CFTC Rule 50.52(b)(4)(ii)-(iii) (relating to the clearing of “outward-facing” swaps) until the earlier of December 31, 2017 and, with respect to a particular jurisdiction, 60 days after the date on which the CFTC announces that it has made a comparability determination as described in Regulation 50.52(b)(4)(i). CFTC Letter 16-80 extends relief previously granted by CFTC Letter 15-62 from the trade execution requirement for swaps between affiliates even when the conditions in CFTC Rule 50.52(b)-(d) are not satisfied. The DMO continues to consider establishing a permanent exemption, which has been requested by ISDA. The current relief is now set to expire on December 31, 2017. Sidley Derivatives | Q4 2016 • 7 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA A copy of No-Action Letter 16-80 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-80.pdf. A copy of No-Action Letter 16-81 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-81.pdf. CFTC Staff Issues No-Action Relief from the Inter-Affiliate Exemption from Required Clearing for Affiliated Counterparties Located in Australia or Mexico On December 15, 2016, the CFTC’s DCR issued no-action relief to swap market participants to permit a provision of the inter-affiliate exemption from required clearing to be relied upon for swaps executed between certain U.S. swap market participants and their affiliated counterparties located in Australia or Mexico. This relief offers counterparties located in Australia and Mexico the same relief that has been available to counterparties located in the EU, Japan and Singapore. A copy of No-Action Letter 16-84 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-84.pdf. CFTC Provides Relief Allowing a Consolidated Risk Disclosure Statement for Non-Institutional Customers On November 30, 2016, the CFTC’s DSIO issued no-action letter 16-82 (Disclosure No-Action Letter) permitting FCMs and IBs to provide a single consolidated risk disclosure statement to non-institutional futures customers (i.e., customers that are not eligible contract participants under the CEA). CFTC regulations require an FCM or IB to provide each non-institutional futures customer with written risk disclosure statements before opening the customer’s account. Prior to November 2013, this could be accomplished using the risk disclosure statement in Appendix A to Regulation 1.55. In November 2013, the CFTC adopted amendments to Regulation 1.55(b) that required an additional risk disclosure statement for non-institutional customers. In response to the request of the Futures Industry Association (FIA), the Disclosure No-Action Letter allows an FCM or IB to provide its non-institutional customers with the FIA Combined Risk Disclosure Statement in lieu of two separate risk disclosure statements. A copy of the Disclosure No-Action Letter is available at: http://www.cftc.gov/idc/groups/ public/@lrlettergeneral/documents/letter/16-82.pdf. A copy of the FIA Combined Risk Disclosure Statement is available at: http://www.cftc.gov/idc/ groups/public/@newsroom/documents/file/fiastatement113016.pdf. CFTC Proposes Rules Establishing Swap Dealer Capital Requirements On December 2, 2016, the CFTC unanimously approved proposed rules establishing minimum capital requirements for swap dealers and MSPs that are not subject to the capital rules of a prudential regulator (essentially non-banks). Minimum capital requirements for swap dealers and MSPs are required to be implemented by Dodd-Frank pursuant to sections 4s(e) and (f) of the CEA. The proposed rules set forth a variety of approaches that may be used to calculate minimum capital requirements, subject to certain conditions. The proposed rules also include recordkeeping, reporting and notification requirements for swap dealers and MSPs relative to their respective capital requirements. Comments must be received by March 16, 2017. A copy of the proposed rules is available at: http://www.cftc.gov/idc/groups/public/@ lrfederalregister/documents/file/2016-29368a.pdf. Sidley Derivatives | Q4 2016 • 8 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA CFTC Re-Proposes Position Limit Rules and Finalizes Aggregation Rules On December 5, 2016, the CFTC voted unanimously to re-propose regulations implementing limits on speculative futures and swaps positions (Reproposed Position Limit Rules), including position limits for 25 core physical agricultural, metals and energy commodity futures contracts traded pursuant to the rules of a DCM and their “economically equivalent” options and swaps. The Reproposed Position Limit Rules are open for public comment through February 28, 2017. In a separate vote, the CFTC unanimously approved final aggregation rules (Final Aggregation Rules) that will apply to the existing position limits regime and, if adopted, the Reproposed Position Limit Rules. The Final Aggregation Rules will take effect on February 14, 2017. The Sidley Update relating to the CFTC’s Reproposed Position Limit Rules and Final Aggregation Rules is available at: http://www.sidley.com/news/2016-12-19-investment-fundsadvisers-and-derivatives-update. CFTC Excludes Farm Credit System Institutions from Classification as Commodity Trading Advisors On December 12, 2016, the CFTC issued an order (FCS Order) that excluded institutions in the Farm Credit System (FCS) from the definition of CTA. The FCS is comprised of federally-chartered borrower-owned lending institutions that are cooperatives, and similar service organizations, and are regulated by the Farm Credit Administration. FCS institutions provide loans, leases and related services to farmers, ranchers and similar borrowers and, as part of these services, often use derivatives to manage their own risk and offer swaps to eligible borrowers to hedge their risk. The CFTC concluded that these lending-related swap transactions are incidental to the FCS institutions’ lending activities. As a result, the CFTC determined that FCS institutions do not fall within the intended breadth of the CTA definition and excluded FCS institutions from classification as CTAs. A copy of the FCS Order is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-12-12/ pdf/2016-29613.pdf. CFTC Provides No-Action Relief for Reporting Requirements under Cleared Swap Rule On December 19, 2016, the CFTC’s DMO issued two no-action letters extending time-limited and conditional relief to DCOs and other entities subject to reporting obligations under the CFTC’s final rule on Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps (Cleared Swap Rule). With an original compliance date of December 27, 2016, the Cleared Swap Rule added and amended certain primary economic terms (PET) data that must be reported by SDRs, DCOs and all parties that clear swaps through DCOs. The rule also established that DCOs must: (i) report the termination of swaps accepted for clearing, known as “alpha swaps;” (ii) report creation data and continuation data for swaps to which the DCO is a counterparty, known as “beta and gamma swaps;” and (iii) generate a unique swap identifier (USI) for each swap and transmit this USI to the DCO counterparty. With respect to any DCO acting subject to a valid exemptive order or no-action letter (Relief DCO), the reporting obligation would fall to the counterparty attempting to clear a swap through the Relief DCO. No-Action Letter 16-85 relieves Relief DCO counterparties from the DCO-specific reporting requirements in (i), (ii) and (iii) above, as well as from restrictions with respect to providing “clearing indicator,” “clearing venue” and other PET data for swaps cleared through Relief DCOs. The relief will be effective until the earlier of January 31, 2018 and the revocation of the exemptive order or no-action letter granting Relief DCO status. Sidley Derivatives | Q4 2016 • 9 Sidley Derivatives QUARTERLY U.S. Derivatives: CFTC & NFA No-Action Letter 16-86 relieves all reporting entities under the Cleared Swap Rule from the obligation to report certain PET creation data for cleared swaps until March 27, 2017. These entities must continue to report the legal entity identifier (LEI) of the SDR to which the original swap was reported and the USI of the original swap, and must also deliver continuation data for all swaps initially reported during the relief period within 20 business days of this period’s end. Separately, DCOs have been granted relief until June 27, 2017 from reporting continuation data on alpha swaps. This relief responds to the difficulty that market participants have faced in coordinating data flows and establishing the systems necessary for DCO compliance, but is conditioned upon certain other reporting obligations intended to mitigate the possible market integrity issues if DCOs do not all begin reporting original swap termination messages to an SDR simultaneously. A copy of No-Action Letter 16-85 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-85.pdf. A copy of No-Action Letter 16-86 is available at: http://www.cftc.gov/idc/groups/public/@ lrlettergeneral/documents/letter/16-86.pdf. NFA Proposes Amendment to Forex Dealer Rules to Require Certain Disclosures of Forex Transaction Data to Forex Customers On November 25, 2016, the NFA proposed an amendment to NFA Compliance Rule 2-36 to require foreign exchange (forex) dealer members to provide customers with certain disclosures. The proposed rule change would provide retail forex customers with a framework for obtaining execution information to review the quality of the execution that the customer received compared to that of other customers at the forex dealer. Specifically, the forex dealer would be required, upon request, to provide a customer with specified transaction data for the 15 transactions in the same currency pair that occurred immediately before and after the customer’s transaction (limited to those transactions that occur 15 minutes before and after the transaction). The proposed rule change reflects the NFA’s view that retail forex customers should have the benefit of greater transparency with respect to transaction data relating to their forex dealer. A copy of the proposed amendment is available at: https://www.nfa.futures.org/news/PDF/ CFTC/CR-2-36-Reqs-Forex-Transactions-111716.pdf. NFA Issues Changes in Minimum Security Deposits for Foreign Exchange Transactions On November 28, 2016, the NFA issued Notice I-16-27 (Forex Notice) which changed the minimum security deposits required to be collected for certain foreign exchange transactions in response to margin changes recently implemented by CME and Intercontinental Exchange, Inc. (ICE). Effective December 5, 2016, for foreign currency futures involving the Mexican peso, Japanese yen and New Zealand dollar, forex dealer members must collect and maintain the following increased minimum security deposits: (i) Mexican peso—eight percent; (ii) Japanese yen—four percent; and (iii) New Zealand dollar—three percent. Foreign currency futures involving the Swiss franc now have a lower minimum security deposit of three percent. These changes will remain in effect until further notice from the NFA. A copy of the Forex Notice is available at: https://www.nfa.futures.org/news/newsNotice. asp?ArticleID=4764. Sidley Derivatives | Q4 2016 • 10 Sidley Derivatives QUARTERLY U.S. Derivatives: SEC & FINRA NFA Requires CPOs and CTAs to Report New Firm-Specific Financial Ratios The CFTC recently approved an amendment proposed by the NFA to NFA’s Compliance Rule 2-46 and a related Interpretive Notice on NFA Compliance Rule 2-46 (Interpretive Notice). Compliance Rule 2-46 requires CPOs and CTAs to file Forms PQR and PR, respectively, on a quarterly basis to provide information important for NFA’s compliance oversight of member firms. Effective June 30, 2017, Forms PQR and PR will require CPOs and CTAs to report two new firm-specific financial ratios. NFA has long collected firm-specific financial information from FCMs and IBs in order to monitor such firms’ financial conditions. NFA has determined that such information will also be collected directly from CPOs and CTAs and has adopted revised Forms PQR and PR to collect two firm-specific financial ratios. The first is the Current Assets/Current Liabilities Ratio (CA/CL Ratio), which divides a firm’s current assets by its current liabilities and is intended to measure a firm’s liquidity. The second is the Total Revenue/Total Expenses Ratio (TR/TE Ratio), which divides a firm’s total revenue by its total expenses, in each case earned or incurred during the prior twelve months, and is intended to measure a firm’s operating margin. NFA has also published the new Interpretive Notice to provide guidance to CPOs and CTAs when reporting the new financial ratios, including definitions and examples of “current assets,” “current liabilities,” “total revenue” and “total expenses.” The financial ratios must be reported based on U.S. generally accepted accounting principles or another internationally recognized accounting standard and use the accrual method of accounting. The Interpretive Notice indicates that there are no minimum ratio percentages; instead, the information will be collected solely to enhance NFA’s existing oversight program. However, it will be a rule violation if a CPO or CTA provides materially false or misleading information when reporting the ratios. Accordingly, CPOs and CTAs will be required to maintain records that support the calculation of the ratios and be able to demonstrate to the NFA how the ratios were calculated. Because CPOs can satisfy their obligation to submit NFA Form PQR by filing CFTC Form PQR, NFA has amended Compliance Rule 2-46 to require such CPOs to provide NFA the additional information collected in the amended NFA Form PQR in the form and manner requested by NFA. NFA staff will be available to address any questions CPOs and CTAs may have on the new ratios and will also produce a new educational webinar in early 2017. The NFA Notice to Members I-16-31, dated December 19, 2016, on this subject is available at: https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4772. The NFA release proposing the amendments, dated September 6, 2016, is available at: https:// www.nfa.futures.org/news/PDF/CFTC/CR-2-46_InterpNotc9071_082016.pdf. SEC Adopts Enhanced Regulatory Framework for Covered Clearing Agencies On September 28, 2016, the SEC adopted final rules establishing enhanced standards for clearing agencies that are deemed systemically important by the Financial Stability Oversight Council or that have a more complex risk profile, such as clearing security-based swaps (Covered Clearing Agencies). The SEC also proposed rules that would expand the definition of a Covered Clearing Agency to include any registered clearing agency that provides the services of a CCP, central securities depository or a securities settlement system. The adopted rules build on existing SEC Rule 17Ad-22 by requiring Covered Clearing Agencies to, among other things, adopt policies and procedures that are reasonably designed to U.S. DERIVATIVES DEVELOPMENTS: SEC AND FINRA Sidley Derivatives | Q4 2016 • 11 Sidley Derivatives QUARTERLY U.S. Derivatives: SEC & FINRA achieve certain minimum standards regarding the comprehensive management of risks, financial risk management (e.g., margin and liquidity risk), settlement, defaults, operational risk management, access, efficiency and transparency. The adopted rules further provide the SEC with procedures to determine whether a Covered Clearing Agency should be considered systemically important in multiple jurisdictions or involved in activities with a more complex risk profile, in which case the Covered Clearing Agency may be required to maintain additional financial resources. The compliance date for the adopted rules is April 11, 2017. The final and proposed rules are available at: https://www.gpo.gov/fdsys/pkg/FR-2016-10-13/ pdf/2016-23891.pdf. LCH SA Applies for Registration as a Clearing Agency On September 27, 2016, the SEC issued a notice of the application of Banque Centrale de Compensation, d/b/a LCH SA (LCH SA) to provide CCP services to U.S. persons for single-name CDS. LCH SA is currently the only CCP in France and is registered with the CFTC as a DCO, permitting it to provide clearing services for broad-based index CDS to its U.S. members and their customers. In its application, LCH SA requested exemptive relief with respect to its “forced trade” mechanism, pursuant to which its members would be required to execute CDS trades based on their price submissions. According to LCH SA, in the absence of exemptive relief, LCH SA may be required to register with the SEC as a national securities exchange. LCH SA has also requested exemptive relief from certain requirements such as filing proposed rule changes with respect to its non-U.S. businesses and providing certain disclosures on its annual audited financial statements. The deadline for comments on LCH SA’s application and request for exemptive relief was October 24, 2016. A copy of the SEC notice regarding LCH SA’s application and request for exemptive relief is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-10-03/pdf/2016-23747.pdf. LCH SA’s Form CA-1 application with the SEC is available at: https://www.sec.gov/rules/ other/2016/34-78941-lch-sa-form-ca-1.pdf. SEC Again Extends Temporary Exemption from Compliance with Rules 13n-1 to 13n-12 under the Securities Exchange Act of 1934 Relating to SDRs On September 29, 2016, the SEC issued an order that extends a temporary exemption from compliance with certain rules relating to SDRs, such as the SDR registration requirement, in order to provide the SEC with additional time to review and consider the applications of two potential SDRs (DTCC Data Repository (U.S.) LLC and ICE Trade Vault, LLC). In the absence of this temporary relief, SDRs would have been required to be in compliance with these rules by March 18, 2016. With this temporary extension, the third such extension in 2016, SDRs remain temporarily exempt from these requirements until April 1, 2017. A copy of the SEC order is available at: https://www.sec.gov/rules/exorders/2016/34-78975.pdf. Sidley Derivatives | Q4 2016 • 12 Sidley Derivatives QUARTERLY U.S. Enforcement SEC Issues Cease-and-Desist Order Against Company for Stock Picking Game That Was an Unregistered Swap On October 13, 2016, the SEC settled charges with Forcerank LLC for $50,000 for failing to register security-based swaps sold to retail investors in the form of mobile phone games marketed as “fantasy sports for stocks.” Through Forcerank LLC, investors participated in weekly contests where they predicted how 10 securities would perform relative to each other. Forcerank LLC retained 10 percent of the players’ entry fees and obtained data about market expectation that it intended to sell to hedge funds and other investors. The order states that these agreements with investors were unregistered security-based swaps because they provided for a payment that was dependent on a potential financial, economic or commercial consequence that was based on the value of individual securities. A copy of the SEC order is available at: https://www.sec.gov/litigation/admin/2016/33-10232. pdf. Sarao Consent Order Entered on Spoofing Case On November 17, 2016, Judge Andrea R. Wood of the U.S. District Court for the Northern District of Illinois entered a consent order (Sarao Order) in the CFTC enforcement proceeding against Navinder Singh Sarao under which Sarao admitted the allegations in the CFTC’s complaint and was required to pay US$25.7 million as a civil monetary penalty and US$12.9 million in disgorgement in settlement of the CFTC complaint alleging that he engaged in spoofing and manipulation of futures prices in violation of the CEA. The Sarao Order also permanently prohibits Sarao from further violations of the CEA and CFTC Regulations and imposes permanent trading and registration bans against Sarao. In a related criminal action, Sarao had pleaded guilty to one count of spoofing and one count of wire fraud for acts that took place on May 6, 2010 (the so-called “Flash Crash Day”). Spoofing enabled Sarao to profit by taking advantage of the price swing resulting from his “spoofed” orders and the subsequent return of the price to its previous levels. A copy of the Sarao Order is available at: http://www.cftc.gov/idc/groups/public/@ lrenforcementactions/documents/legalpleading/enfsaraoorder111416.pdf. A copy of the related CFTC Press Release is available at: http://www.cftc.gov/PressRoom/ PressReleases/pr7486-16. CFTC Fines Individual for Misappropriation of Employer’s Information in Futures and Options Trading On September 29, 2016, the CFTC issued an order (Ruggles Order) settling charges against Jon P. Ruggles for engaging in fraudulent trades in oil and gas futures on the New York Mercantile Exchange (NYMEX). The CFTC found that Ruggles, who was responsible of developing fuel hedging strategies and executing trades for his employer, owed a duty of trust and confidence to act in the employer’s best interest and keep confidential the employer’s material, nonpublic information regarding trading activity. The CFTC indicated that Ruggles breached those duties and misappropriated the employer’s confidential material, nonpublic trading information for his own benefits by trading the same NYMEX products in personal accounts in his wife’s name. The Ruggles Order requires Ruggles to disgorge over US$3.5 million, imposes a penalty of US$1.75 million, and permanently bans Ruggles from trading and registering with the CFTC. A copy of the Ruggles Order is available at: http://www.cftc.gov/idc/groups/public/@ lrenforcementactions/documents/legalpleading/enfrugglesorder092916.pdf. U.S. ENFORCEMENT DEVELOPMENTS Sidley Derivatives | Q4 2016 • 13 Sidley Derivatives QUARTERLY U.S. Enforcement CFTC Finds Firm Acted as Unregistered Commodity Trading Advisor and Failed to Disclose Conflicts to its Counterparties On September 29, 2016, the CFTC ordered Angus Partners LLC (Angus) to pay a US$250,000 civil penalty for acting as an unregistered CTA and violating disclosure rules applicable to CTAs. The order (Angus Order) finds that, since October 2012, Angus engaged in the business of advising more than 15 clients for compensation or profit in connection with over-the-counter commodity option and swap contracts and held itself out generally to the public as a CTA without being registered. The Angus Order indicates that Angus advised clients on fuel hedging programs to mitigate clients’ exposure to price movements and then entered into commodity option and swap transactions with these clients. For each client trade, Angus entered into an offsetting trade with a third party and was compensated by the spread between the client trade and the offsetting trade. The CFTC further found that Angus failed to disclose to its clients its financial interest in the trades and the related conflict of interest. A copy of the Angus Order is available at: http://www.cftc.gov/idc/groups/public/@ lrenforcementactions/documents/legalpleading/enfangusorder092916.pdf. CFTC Releases Annual Enforcement Results for 2016 On November 21, 2016, the CFTC released its enforcement results for fiscal year 2016. The CFTC filed 68 enforcement actions and obtained approximately $1.29 billion in restitution, disgorgement and penalties. The CFTC pursued litigation in over 100 cases and issued a whistleblower award of more than $10 million. From its actions, the CFTC deposited over $484 million in civil monetary penalties to the U.S. Treasury, almost twice its operating budget for the fiscal year. Significant cases included, among others, actions charging employees of companies with misappropriating and trading based on material non-public information, actions for spoofing and manipulation, actions for attempted manipulation relating to LIBOR and ISDAfix, and actions against registered swap dealers, FCMs and others for reporting and recordkeeping violations. A copy of the applicable CFTC Release is available at: http://www.cftc.gov/PressRoom/ PressReleases/pr7488-16. SEC Settles Case with Firm Selling Unregistered Swaps Involving Pre-IPO Companies On December 6, 2016, the SEC settled charges with Equidate Inc. for $80,000 for failing to register security-based swaps that were offered and sold online to shareholders in companies that were not publicly traded (pre-IPO companies). Equidate, Inc. matched the holders of shares in private companies with investors by creating financial contracts with payment provisions that were triggered by the occurrence of a specific event, such as a merger, acquisition or IPO of the underlying company. For example, a holder of the private company shares would receive an upfront payment from an investor, and would be required in turn to make certain payments to the investor upon the occurrence of such an event. Equidate, Inc. did not file a registration statement for these security-based swaps or sell them through a national securities exchange, as required under applicable regulations. A copy of the SEC order is available at: https://www.sec.gov/litigation/admin/2016/33-10262. pdf. Sidley Derivatives | Q4 2016 • 14 Sidley Derivatives QUARTERLY European Derivatives European Commission Report on Review of European Market Infrastructure Regulation On November 23, 2016, the EC published a communication (Evidence Communication) on the “Call for Evidence” conducted earlier this year relating to the EU financial services regulatory framework, together with a report (EMIR Report) on the review of EMIR. In these documents, the EC proposed certain targeted actions designed to fine-tune the EU regulatory framework, with the aim of achieving key goals: ■ Enhancing the proportionality of rules. This will include a review of EMIR clearing and margining requirements for non-financial companies, pension funds and small financial institutions. ■ Reducing undue regulatory burdens. The EC is in particular committed to undertaking a review of how transaction reporting requirements could be consolidated and streamlined, and how compliance costs could be reduced for smaller non-financial counterparties. ■ Making rules more consistent and forward-looking. The EC in particular aims to resolve certain unintended consequences of the interaction between the EU bank leverage ratio and the EMIR clearing obligation, which may ultimately undermine the EU objective to promote a reduction of risks through central clearing. The EMIR Report is not a legislative proposal, but is instead the first step in a process that will lead to targeted amendments to EMIR during 2017. A copy of the Evidence Communication is available at: http://eur-lex.europa.eu/legal-content/ EN/TXT/?qid=1481281099294&uri=CELEX:52016DC0855. A copy of the EMIR Report is available at: https://ec.europa.eu/info/upcoming-0_en. Delegated Regulation on Position Limits Adopted by European Commission On December 8, 2016, the EC published the final text for a regulation (Delegated Regulation) on the application of position limits to EU commodity derivatives. Position limits will apply not only to EU counterparties, but also to any non-EU entity that trades commodity derivatives on an EU trading venue. A copy of the Delegated Regulation is available at: http://ec.europa.eu/finance/docs/level-2- measures/mifid-rts-21_en.pdf. Publication of Delegated Act on Margin Exchange On December 15, 2016, a delegated act on margin exchange for non-cleared OTC derivatives was published in the Official Journal of the EU pursuant to Article 11(3) of EMIR. The act entered into force on January 4, 2017, and mandatory exchange of initial and variation margin for the largest counterparties will apply one month later. Variation margin requirements will, however, be phased in for the majority of counterparties on March 1, 2017. A copy of the delegated act is available at: http://ec.europa.eu/finance/docs/level-2-measures/ mifid-rts-21_en.pdf. EUROPEAN DERIVATIVES DEVELOPMENTS Sidley Derivatives | Q4 2016 • 15 Sidley Derivatives QUARTERLY Asia Derivatives ESMA Recognizes ICE Clear US On December 14, 2016, ESMA confirmed that ICE Clear US has been “recognized” as a third-country CCP by adding ICE Clear US to its list of recognized third-country CCPs under EMIR (Third-Country CCP List). This means EU counterparties will be able to use ICE Clear US to fulfill their clearing obligations under EMIR. A copy of the Third-Country CCP List is available at: https://www.esma.europa.eu/sites/default/ files/library/third-country_ccps_recognised_under_emir.pdf. Brexit Developments On January 17, 2017, UK Prime Minister Theresa May set out her priorities for Brexit in a speech confirming that the United Kingdom will withdraw from the European single market. The speech also indicated that the UK will leave the European customs union, but that Prime Minister May retains an “open mind” on what any future customs deal would look like. The UK Government intends to negotiate a “phased” approach to implementation of Brexit; this is positive news for the financial services sector, which has recommended a transitional period of access to the single market for financial services firms. The final agreement with the EU will be put to a vote in both Houses of Parliament. China China Allows Overseas Institutions to Participate in CFETS Foreign Currency Lending Market On September 22, 2016, China Foreign Exchange Trade System (CFETS) released a Notice on the Arrangements for Overseas Institutions to Participate in the CFETS Foreign Currency Lending Market (Notice). The Notice allows qualified overseas institutions to borrow and lend in the interbank foreign currency market. Pursuant to the Notice, overseas banks, including foreign banks and foreign subsidiaries of Chinese banks, which are permitted to conduct foreign currency lending in their home jurisdictions, may apply to CFETS for foreign currency lending membership and may conduct foreign currency lending transactions through the CFETS trading system. Further information is available at: http://www.chinamoney.com.cn/english/svcnrl/20160922/ 2003.html. Hong Kong Hong Kong Exchanges and Clearing Limited Defers Rollout of Volatility Control Mechanism for its Derivatives Market On November 13, 2016, the Hong Kong Exchanges and Clearing Limited announced its decision to defer the launch of its Volatility Control Mechanism (VCM), a measure designed to protect market integrity by preventing extreme price volatility arising from major trading errors and other unusual incidents, for its derivatives market. The launch was originally scheduled for introduction on November 14, 2016, but was deferred due to a potential technical issue. ASIA DERIVATIVES DEVELOPMENTS Sidley Derivatives | Q4 2016 • 16 Sidley Derivatives QUARTERLY Asia Derivatives VCM will apply only to the spot month and next calendar month contracts of Hang Seng Index (HSI) Futures, Mini-HSI Futures, H-shares Index (HHI) Futures and Mini HHI Futures. A cooling-off period of five minutes, where trading of the contract can continue but within a band, will be triggered if there is an attempt to trade a contract at a price more than five percent away from the reference price. The reference price is the price of the last or most recent trade (within five minutes), excluding prices of tailor-made combination trades, block trades and combo versus combo trades. In each of the morning and afternoon trading sessions, there is a maximum of one trigger per contract. Further information is available at: http://www.hkex.com.hk/eng/newsconsul/ hkexnews/2016/161024news.htm; and http://www.hkex.com.hk/eng/newsconsul/ hkexnews/2016/161113news.htm. Consultation on Regulations for Protected Arrangements under Financial Institutions (Resolution) Ordinance Launched On November 22, 2016, the Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission (SFC) and the Insurance Authority launched a two-month public consultation on a set of proposed regulations relating to protected arrangements under the Financial Institutions (Resolution) Ordinance (Cap. 628). The consultation covers a set of proposed regulations relating to “protected arrangements” under the ordinance: clearing and settlement system arrangements, netting arrangements, secured arrangements, set-off arrangements, structured finance arrangements and title transfer arrangements. The consultation welcomes views on the scope and degree of protection for different classes of such protected arrangements, including carve-outs from protections in order not to restrict a resolution authority from achieving an orderly resolution. The Financial Institutions (Resolution) Ordinance had been enacted by the Legislative Council on June 22, 2016 and provides the legal basis for the establishment of a cross-sectoral resolution regime for financial institutions in Hong Kong. It will become effective on a date to be designated by the Secretary for Financial Services and the Treasury, concurrent with the effective date of implementation of the regulations. Further information is available at: http://www.fstb.gov.hk/fsb/ppr/press/doc/pr22112016a_e. pdf. Hong Kong Securities and Futures Commission Proposes to Enhance Asset Management Regulation and Point-of-Sale Transparency On November 23, 2016, the SFC launched a three-month consultation on proposals to enhance the regulation of the asset management industry and point-of-sale transparency. With a view to protecting investors’ interests more effectively and ensuring market integrity, the regulator formulated the proposals after a review of major international regulatory developments, factoring in observations and views from industry stakeholders. The proposed changes will be made to the SFC’s Fund Manager Code of Conduct (FMCC) and the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). Sidley Derivatives | Q4 2016 • 17 Sidley Derivatives QUARTERLY Asia Derivatives The key areas of enhancement under the FMCC relate to securities lending and repurchase agreements, custody of fund assets, liquidity risk management and disclosure of leverage by fund managers. The proposed changes to the Code of Conduct will seek to address the potential conflicts of interest in the sale of investment products and enhance disclosure at the point-of-sale by: ■ restricting an intermediary from representing itself as “independent” or using any term(s) with a similar inference if the intermediary receives a commission or other monetary or non-monetary benefit or has links or other legal or economic relationships with product issuers that are likely to impair its independence; and ■ requiring an intermediary to disclose the range and maximum dollar amount of any monetary benefits received or receivable that are not quantifiable prior to or at the point of sale. Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-andannouncements/news/doc?refNo=16PR124. Hong Kong Securities and Futures Commission Authorizes Dubai Mercantile Exchange Limited to Provide Automated Trading Services On November 24, 2016, the SFC authorized Dubai Mercantile Exchange Limited to provide automated trading services in Hong Kong via the Globex System of CME pursuant to section 95(2) of the Securities and Futures Ordinance. Further information is available at: http://www.sfc.hk/web/EN/pdf/Gazette/G.N.%20 6843%20of%202016.pdf; and http://www.sfc.hk/web/EN/files/SOM/ATS/Notice%20of%20 Authorization%20-%20to%20CME%20clearing%20system.pdf. Hong Kong Securities and Futures Commission and Swiss Financial Market Supervisory Authority Sign Agreement on Switzerland-Hong Kong Mutual Recognition of Funds On December 2, 2016, the SFC and the Swiss Financial Market Supervisory Authority signed a Memorandum of Understanding on Switzerland-Hong Kong Mutual Recognition of Funds and Asset Managers (MOU). The MOU will enable eligible Swiss and Hong Kong public funds to be distributed in each other’s market through a streamlined vetting process. It also creates a framework for exchange of information, regular dialogue and regulatory cooperation in relation to the cross-border offering of public funds. The mutual recognition of funds initiative is expected to create new opportunities for the Swiss and Hong Kong asset management industries, as well as providing investors in both markets with a broader selection of fund products. It also affords home-grown Hong Kong funds direct access to the investing public in a European market for the first time. Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/circular/ openFile?refNo=16EC63. Launch of Shenzhen-Hong Kong Stock Connect On December 5, 2016, Shenzhen-Hong Kong Stock Connect (Stock Connect) was successfully launched. The launch was approved by the SFC and the China Securities Regulatory Commission (CSRC) on November 25, 2016. Stock Connect expands mutual stock market access between Hong Kong and Mainland China to cover the Shenzhen Stock Exchange. Sidley Derivatives | Q4 2016 • 18 Sidley Derivatives QUARTERLY Asia Derivatives The necessary trading and clearing rules, daily quota mechanisms and other regulatory and operational arrangements have been finalized. The stock exchanges and clearinghouses have completed a series of market rehearsals to ensure the intended functionalities are effective. On the regulatory front, the SFC and CSRC have vowed to liaise with each other on investor protection, deterring market misconduct, cross-boundary investigations and major events that affect the mutual trading access. Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-andannouncements/news/doc?refNo=16PR127; and http://www.sfc.hk/web/EN/files/ER/MOU/ ENF_MOU_Eng_2016.pdf. Singapore Monetary Authority of Singapore Issues Guidance on OTC Derivatives Reporting On October 10, 2016, the Monetary Authority of Singapore (MAS) issued Frequently Asked Questions on the Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013 (FAQs). The FAQs are intended to aid implementation of the over-the-counter (OTC) derivatives reporting obligations and elaborate on the intent of the Regulations. A copy of the FAQs is available at: http://www.mas.gov.sg/~/media/MAS/Regulations%20 and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Securities%20 Futures%20and%20Fund%20Management/Regulations%20Guidance%20and%20Licensing/ FAQs/FAQs%20%20on%20the%20Securities%20and%20Futures%20Reporting%20of%20 Derivatives%20Contracts%20Regulations%202013.pdf. Bill in Singapore Parliament to Complete the Monetary Authority of Singapore’s OTC Derivatives Regulatory Reforms On November 7, 2016, the Securities and Futures (Amendment) Bill 2016 (Reform Bill) was moved in the Singapore Parliament for first reading, and was passed on January 9, 2017. The Reform Bill amends the Securities and Futures Act, Chapter 289 of Singapore (SFA) to implement a capital markets regulatory framework aligned to international standards. The Reform Bill completes the MAS’ two-phase review to implement OTC derivatives regulatory reforms and moves regulatory oversight of commodity derivatives, currently under the Commodity Trading Act, Chapter 48A of Singapore and administered by International Enterprise Singapore, under the SFA. Among other things, the Reform Bill seeks to include intermediaries dealing in OTC derivatives within MAS’ supervisory ambit. Going forward, a capital markets intermediary will be required to be licensed to deal in capital market products and to indicate the specific type of products it will be dealing in. In addition, the Reform Bill empowers the MAS to require that derivatives contracts meeting certain criteria be traded on organized trading facilities or exchanges, adding to the MAS existing power to require reporting of trade information and central clearing of certain OTC derivatives. Further information on the Reform Bill is available at: http://www.mas.gov.sg/News-andPublications/Speeches-and-Monetary-Policy-Statements/Speeches/2016/Explanatory-BriefSecurities-and-Futures-Amendment-Bill-2016.aspx. Sidley Derivatives | Q4 2016 • 19 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 CDS Credit Default Swaps 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 | Q4 2016 • 20 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 | Q4 2016 • 21 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 firstname.lastname@example.org Andrew P. Blake Partner +1 202 736 8977 email@example.com Nathan A. Howell Partner +1 312 853 2655 firstname.lastname@example.org Kenneth A. Kopelman Partner +1 212 839 5834 email@example.com Michele Navazio Partner +1 212 839 5310 firstname.lastname@example.org William J. Nissen Partner +1 312 853 7742 email@example.com Ellen P. Pesch Partner +1 212 839 5569 firstname.lastname@example.org Robert J. 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Derivatives Quarterly Newsletter: 4th Quarter 2016
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