At the same time, the CFTC also established a procedure for “substituted compliance” under which non-U.S. banks and foreign branches of U.S. banks may apply rules of their local swap regulators instead of those of the CFTC governing SDs and MSPs.
Information regarding these pronouncements follows:
A. Deferred U.S. Registration by Foreign Entities
- Under the CFTC’s original exemptive order issued in December 2012, foreign entities that fell within the Act’s definitions of SDs or MSPs – as well as overseas branches of U.S. SDs and MSPs – would have been required to register as such with the CFTC by July 12, 2013, becoming subject to strict new rules governing their swaps with “U.S. persons,” including requirements as to capital; swap documentation and business practices; swap reporting and recordkeeping; and margin requirements.
- The term “U.S. persons” was broadly defined to include individuals, corporations, partnerships, limited liability companies, hedge funds, other business entities, trusts, estates, pension plans and individual and joint accounts residing or organized in the U.S
- Many foreign banks and finance ministers objected to the potential scope of the CFTC’s cross-border rules, either withdrawing or threatening to withdraw from the U.S. derivatives market if these rules were imposed.
- The CFTC proposed to soften its approach by permitting non-U.S. SDs and MSPs to comply with their home regulators’ swap rules if the CFTC determined the laws, rules and enforcement regime were “comparable” to those of the CFTC. However, most European and other non-U.S. swap regulators have not finalized their swap rules.
- Under the CFTC’s recent order, the July 12, 2013 deadline was extended to December 21, 2013. The CFTC also agreed to decide by December 21 whether swap rules in Australia, Canada, the EU, Hong Kong, Japan and Switzerland are similar enough to those in the U.S. to allow entities in those jurisdictions to substitute them for the U.S. D-F rules.
- Financial firms and branches of U.S. banks operating in other countries such as Singapore, South Africa and Russia would be required to start complying with the new requirements 75 days after publication in the Federal Register.
- The CFTC announced a separate agreement with the EU under which requirements for European swap trading platforms will be delayed until March 2014. While accommodating the Europeans’ demands for additional time to establish their own rules and recognizing certain similarities between the U.S. and EU rules, the CFTC did not accept the two systems as equivalent.
B. Other Issues Affecting Foreign Swap Counterparties
- In addition, the CFTC, the Securities and Exchange Commission and foreign swap regulators must still coordinate their approaches on other issues such as margin and capital requirements for uncleared swaps and risk management procedures applicable to various swap parties.
- Despite the adoption of “EMIR,”1 the overarching mandate approved by the European Parliament charged with regulating derivatives, “ESMA,” the European Securities Market Authority, must still finalize its own rules and coordinate these with the rules of its 27 member states. Worthy of note is the fact that EMIR’s directive applies differently to financial counterparties, non-financial counterparties whose derivative contracts exceed a clearing threshold and non-financial counterparties whose swaps fall below the threshold.
- The potential patchwork of regulatory requirements emerging from different jurisdictions could make it more difficult and confusing for end-users – those entities that employ swaps solely to hedge commercial risk and not for speculation – to assure that their cross-border swaps comply with all applicable rules.
- ESMA has published a consultation paper on proposals to define the situations in which EMIR rules can be applied to OTC derivatives transactions between two counterparties established outside the EU. As a general rule, EMIR does not apply to such transactions, but it includes a provision to bring them within its scope where they have a direct, substantial and foreseeable effect in the EU or where they are designed to avoid EMIR. The consultation paper seeks views on proposals to define these two concepts. The consultation period is open until September 16, 2013.
- Furthermore, ESMA has confirmed that it is considering pushing back its trade reporting deadline for exchange-traded derivatives from January 2014 until as late as January 2015, creating additional disparities between European and U.S. swaps regulations.