European Commission and CFTC announce a path forward on cross-border regulation of OTC derivatives

by DLA Piper
Contact

On July 11, 2013, the Commodity Futures Trading Commission and the European Commission announced a high-level joint understanding (referred to in the announcement as the “Path Forward”) regarding the approach to the cross-border regulation of over-the-counter derivatives .  The announcement comes one day before the CFTC is scheduled to hold a highly-anticipated open meeting to consider its final cross-border guidance and associated phase-in for compliance.  The full text of the announcement can be found here.

 

To address market participants’ concerns that cross-border transactions in derivatives could result in duplicative, conflicting or inconsistent regulatory burdens, and to reduce the incentive to engage in regulatory arbitrage, the CFTC and the EC have generally agreed that the applicable regulators should, where appropriate, defer to the regulatory requirements in another jurisdiction when it is “justified” by the quality of the regime in that jurisdiction.  At the same time, the CFTC and the EC are focused on ensuring that their coordinated cross-border approach to regulating derivatives does not permit overseas guaranteed affiliates and branches of US and European Union persons to operate outside of their collective regulatory regimes.

 

While the announcement is light on details, it does contain certain statements that are noteworthy. 

 

  • The announcement indicates that in the case of a non-US swap dealer (SD) that is not affiliated with or guaranteed by a US person, such non-US SD will only be subject to the CFTC’s transaction-level requirements (e.g., clearing and trade execution, margining, external business conduct standards, swap trading relationship documentation, portfolio reconciliation and compression and trade confirmation) in transactions with US persons and guaranteed affiliates of US persons. 

 

  • In respect of market participants that are subject to the requirements of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act or European Market Infrastructure Regulation (EMIR), the announcement indicates that the CFTC is expected to issue a no-action letter that where a swap is subject to joint jurisdiction under the US and EU risk mitigation rules (e.g., certain business conduct standards such as confirmation, portfolio reconciliation, portfolio compression, valuation and dispute resolution), compliance under EMIR will achieve compliance with the relevant CFTC rules. The CFTC implemented that pronouncement by issuing Letter 13-45 on July 11, 2013. The announcement also indicates that non-US branches of US SDs may be able to comply with certain CFTC rules through substituted compliance by complying with the equivalent requirements of its home jurisdiction so long as certain conditions are met.  This concept of “substituted compliance” was contained in the CFTC’s proposed guidance regarding the cross-border application of certain swap provisions published on July 12, 2012 in situations involving certain non-US persons registered with the CFTC transacting with certain other non-US persons. 

 

  • The announcement provides that the definition of US person “should” include offshore hedge funds and collective investment vehicles that are either majority-owned by US persons or that have their principal place of business in the US.  Such an approach would be a departure from the CFTC’s latest version of the definition of US person offered in the Final Exemptive Order Regarding Compliance with Certain Swap Regulations issued in January of this year and which expires tomorrow which specifically excluded offshore funds and collective investment vehicles from the definition of US person even if they have their principal place of business in the US.

 

  • In respect of mandatory clearing, the announcement provides that the CFTC and the EC have agreed upon a “stricter-rule-applies” approach for certain cross-border transactions such that where exemptions from clearing would apply in one jurisdiction but not another, such transactions would need to be cleared.

 

The announcement is intended to be a statement of understanding between the CFTC and the EC and therefore does not specifically address some of the more controversial issues raised by cross-border regulation.  For instance, the announcement does not address how non-US affiliates of US SDs or non-US SDs that are guaranteed by US persons will be treated under the CFTC’s final cross-border guidance and the larger cross-border regulatory approach of the CFTC and the EC.  We expect more clarity surrounding the cross-border regulation of derivatives following tomorrow’s CFTC open meeting and we anticipate providing a more in-depth review of the cross-border application of derivatives regulation in the near future.

 

FROM THE ARCHIVE

CFTC issues two proposals affecting those engaging in swaps activities

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper
Contact
more
less

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!