The Commodity Futures Trading Commission approved a final rule that removes certain reporting and recordkeeping requirements for trade option counterparties that are neither swap dealers nor major swap participants (Non-SD/MSPs), such as commercial end-users that transact in trade options in connection with their businesses.  The final rule became effective on March 21, 2016.

The final rule eliminates the Form TO annual notice reporting requirement for otherwise unreported trade options in CFTC regulation 32.3(b). Furthermore, Non-SD/MSPs will not be subject to part 45 reporting requirements in connection with their trade options. The CFTC did not impose a proposed reporting requirement that a commercial participant would need to provide notice to the CFTC of its trade options activities if such activities had a value of more than $1 billion in any calendar year.

The final rule also eliminates the swap-related recordkeeping requirements for Non-SD/MSPs in connection with their trade option activities.  However, Non-SD/MSPs transacting in trade options with SDs or MSPs must obtain a legal entity identifier and provide it to their SD/MSP counterparties.

CFTC No-Action Letter 13-08, which has provided conditional relief for Non-SD/MSPs from certain swap-related reporting and recordkeeping requirements, has been withdrawn.  Also, given the elimination of the Form TO reporting requirement, CFTC staff is of the view that a trade option counterparty that is a Non-SD/MSP is not required to report its otherwise unreported trade options for calendar year 2015 on Form TO.

The final rule will become effective upon publication in the Federal Register. 

View the final rule. 

An equivalence Decision on the derivatives regulatory regimes for derivatives clearing organisations in the United States was published in the Official Journal of the European Union. The Decision follows the announcement by the European Commission and the Commodity Futures Trading Commission of a common approach on the supervision of CCPs operating in the US and EU. The Decision declares that the legal and supervisory arrangements of the CFTC for DCOs that have been declared systemically important derivatives clearing organisations by the Financial Stability Oversight Council or DCOs that have opted into additional standards similar to the SIDCO regime (so-called “Subpart C DCOs”) are equivalent to the EU requirements under EMIR, provided that the DCO’s internal rules and procedures meet the following requirements: (i) for derivatives contracts executed on regulated markets, a minimum liquidation period of two days for initial margin is applied to clearing members’ proprietary positions; (ii) for all derivative contracts, measures are in place to limit procyclicality which are equivalent to the options under EMIR; and (iii) the DCO has sufficient pre-funded available resources enabling it to withstand the default of at least two clearing members to which it has the largest exposures under extreme conditions. 
 

The Commodity Futures Trading Commission’s Division of Market Oversight issued a no-action letter extending the time period for relief from the requirement in CFTC Regulation 37.6 that a SEF obtain documents incorporated by reference in a trade confirmation issued by the SEF prior to issuing the confirmation. SEFs are also relieved from the requirement in CFTC Regulations 37.1000, 37.1001 and 45.2(a) to maintain such documents as records. Finally, the no-action letter states that SEFs are relieved from the requirement in CFTC Regulation 45.3(a) to report confirmation data contained in the documents incorporated by reference in a confirmation.

The letter extends the relief previously provided in CFTC Staff Letter 15-25, which expires on March 31, 2016.  The letter extends relief to the earlier of: (i) 11:59 pm (Eastern Time) March 31, 2017 or (ii) the effective date of revised CFTC regulations that establish a permanent solution to the confirmation matters raised by the current regulations. The relief is subject to terms and conditions in the letter.

A SEF must continue to report all swap data that the SEF is reporting as of the time of the issuance of the letter, as required by part 45 of the CFTC’s regulations, even if such data is contained in the documents that the SEF incorporates by reference in a confirmation. 

View the CFTC press release.

View the CFTC Staff Letter 16-25. 

View the CFTC Staff Letter 15-25.

The European Supervisory Authorities published final draft regulatory technical standards on risk-mitigation techniques, including details on specific operational procedures, for OTC-derivative contracts not cleared by a Central Counterparty. Under the European Market Infrastructure Regulation, counterparties to uncleared OTC derivative transactions are required to implement risk mitigation techniques to reduce counterparty credit risk. These draft RTS prescribe the regulatory margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated. 

Read more.

The European Commission announced that it had adopted a Delegated Regulation on the clearing obligation for credit derivatives. Under the European Market Infrastructure Regulation, the European Securities and Market Authority is required to develop draft Regulatory Technical Standards setting out the categories of OTC derivatives that should be subject to the clearing obligation, the date/s from which the obligation should apply and the minimum remaining maturity of OTC derivatives. ESMA provided its final draft RTS for the mandatory clearing of CDS to the European Commission in February 2015.  The Delegated Regulation, which does not substantively change the ESMA RTS, provides for untranched iTraxx Index CDS (Main, EUR,5Y) and untranched iTraxx Index CDS (Crossover, EUR,5Y) derivatives to be subject to the clearing obligation. The obligation will be phased in according to counterparty type to allow market participants time to determine whether the obligation applies to them and set up procedures to ensure compliance, in a similar way as was done for interest rate swaps. Counterparty classifications are established for these purposes, which are also the same as those set for the clearing obligation for interest rate swaps. The exact dates for when the clearing obligation will come into effect will be determined by the date of publication of the Delegated Regulation in the Official Journal of the European Union.
 
View the Delegated Regulation.
 
View the annex to the Delegated Regulation.
 
You may like to view our client note on interest rate swap clearing obligation. 

The European Securities and Markets Authority published a final report setting out possible systematic risk and cost implications of interoperability arrangements between central counterparties. The report focuses on the complexities of interoperable arrangements and the adequacy of risk management systems and models of CCPs. Interoperability arrangements, as defined in the European Markets Infrastructure Regulation, are arrangements between two or more CCPs which involve a cross-system execution of transactions. The Report details the general EU regulatory framework applicable to interoperability arrangements, as set out in the European Market Infrastructure Regulation, and related Guidelines and recommendations. The report provides a summary of interoperability arrangements for different products between EU CCP's, in relation to products such as EU equities, EU government bonds and EU Exchange Traded Derivatives.  The report identifies the main new risk as that arising between the two CCPs which are interoperating, but notes that some EU CCPs have set up mechanisms to mitigate the risks of under-collateralisation, including when reuse of collateral is permitted. The Report is to be submitted to the European Commission and European Parliament.  It will contribute to the report that the European Commission is responsible for submitting on the potential risks of interoperability.

View the press release and report.

The International Swaps and Derivatives Association published a paper which analyzes the regulatory frameworks in the US and EU for the supervision and oversight of trading platforms and aims to provide principles for the recognition of EU trading platforms by the US Commodity Futures Trading Commission. Both the US and the EU have introduced rules which require certain derivatives to be traded on trading platforms. The US rules, which came into force in October 2013, provide that US persons may only trade the relevant derivatives on platforms that have registered as a Swap Execution Facility and that are subject to the oversight of the CFTC. The EU Markets in Financial Instruments Regulation, which is currently due to come into force on January 3, 2017 unless proposed legislation is passed to delay it for a year, requires certain derivatives to be traded on EU trading venues. ISDA considers that the CFTC should be able to make comparability decisions, deeming EU trading platforms comparable with those in the US, by focusing on the outcomes and core objectives of the EU regime, thereby recognizing EU trading platforms as SEFs. This would allow US persons to trade on an EU trading venue in compliance with the US trade execution rules.
 
View ISDA's paper.

The US Commodity Futures Trading Commission’s Division of Market Oversight issued a no-action letter providing time-limited relief for end users from the Form TO filing requirement under CFTC Regulation 32.3(b)(2), which the CFTC has proposed to amend.  The regulation currently requires counterparties to trade options that are not required to be reported to a swap data repository to submit a Form TO filing by March 1 following the end of any calendar year during which they entered into one or more unreported trade options. While the CFTC is considering the proposed amendment to the Trade Options Rule, DMO will not recommend that the CFTC take enforcement action against a market participant that is neither a swap dealer nor a major swap participant for failing to report its otherwise unreported trade options entered into during 2015 on Form TO by April 1, 2016.

View the CFTC press release.

View CFTC Staff Letter 16-10.  

View the CFTC regulation.  

The US Commodity Futures Trading Commission’s Division of Market Oversight and Office of Data and Technology staff extended the comment period on the draft technical specifications for certain prioritized swap data elements and associated questions to March 7, 2016.  The draft technical specifications include certain swap data elements that are reportable under Part 45 and related provisions of the CFTC’s regulations, as well as certain swap data elements that are not currently reportable under the CFTC’s regulations, but which have been identified as data elements that may assist the CFTC in fulfilling its regulatory mandates.  Specifically, the request for comment seeks public input on 80 questions addressing 120 data elements for various swap data reporting topics including counterparty-related elements, price, clearing, product, periodic reporting, orders, package transactions, options, additional fixed payments, notional amount, events, rates and foreign exchange. 

View the CFTC press release. 

View the draft technical specifications.    

The US Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight provided no-action relief clarifying that the exemption from registration in Rule 3.10(c)(3) for persons located outside the United States who act as Introducing Brokers, Commodity Trading Advisors or Commodity Pool Operators on behalf of persons located outside of the United States is available in connection with swaps that are not submitted for clearing if such swaps are not subject to a CFTC clearing requirement.

View the CFTC no-action letter.
 

The US Securities and Exchange Commission adopted rules applicable to non-US firms engaging in cross-border security-based swap activities.  Under the final rules, a non-US company that arranges, negotiates or executes a security-based swap transaction in connection with its dealing activity using personnel located in a US branch or office must count that transaction when determining eligibility for the de minimis exception to the security-based swap dealer registration requirement. A non-US firm must include such transactions in its de minimis threshold calculation together with security-based swap transactions connected with its dealing activity where its counterparty is a US person. Compliance with the rules is not required until the latest of either 12 months following publication in the Federal Register or the “SBS Entity Counting Date,” as specified in the SEC’s SBS Entity Registration adopting release.

View the SEC press release. 

View the final rules. 

The European Commissioner for Financial Stability, Financial Services and Capital Markets Union and the US Commodity Futures Trading Commission jointly announced the adoption of a common approach regarding requirements for transatlantic central clearing counterparties. The common approach is intended to resolve an impasse that had prevented recognition of US CCPs under EMIR. Under the common approach, the European Commission is expected to determine that CFTC regulation of central counterparties is equivalent to EU requirements, subject to certain conditions. The CFTC is also expected to propose a determination of comparability with respect to certain EU requirements in order to permit EU CCPs that are or seek to be registered as derivatives clearing organizations to comply with such EU requirements in lieu of US requirements. The CFTC staff also committed to streamlining the registration process for EU CCPs wishing to register with the CFTC. In statements, CFTC Chairman Timothy Massad and Commissioner Jonathan Hill applauded the adoption of the common approach as an important step toward stable and uniform regulation of the global derivatives market.

View the Shearman & Sterling publication on the common approach. 

View the statement of CFTC Chairman Timothy Massad regarding the common approach.

View the statement of Commissioner J. Christopher Giancarlo regarding the common approach. 
 

The European Commission and US Commodity Futures Trading Commission announced they had reached agreement on a common approach to requirements for central clearing counterparties. The Commission is expected to adopt an equivalence decision affirming that the CFTC requirements for US CCPs are equivalent to those under the European Market Infrastructure Regulation. US CCPs recognised under EMIR will be able to continue to provide services in the EU whilst complying with CFTC requirements, although this will likely be subject to US CCP compliance with certain aspects of EU rules on collateral calculations.

Read more.

The European Securities and Markets Authority published a report providing an overview of its 2015 supervisory work relating to Credit Rating Agencies and Trade Repositories and setting out its workplan for 2016. ESMA's focus for 2016 includes: (i) improving the quality of credit ratings; (ii) improving trade repository quality data and data access; (iii) improving CRA governance and strategy; (iv) devoting resources to its enforcement work where it is aware of facts that may be infringing regulatory requirements; and (v) enhancing international cooperation with third country supervisors.
 
View the report.

The European Securities and Markets Authority published a document comprising a set of Opinions on certain UK pension schemes that are to be exempt from centrally clearing OTC derivatives contracts under the European Market Infrastructure Regulation. The Opinions have been requested by the UK Financial Conduct Authority and relate to 16 different kinds of pension schemes. Transitional exemptions from the clearing obligation can be granted to pension scheme arrangements that meet certain criteria, essentially, when OTC derivatives contracts are entered into and are used for hedging purposes. To obtain an exemption, requests must be made by the pension scheme to a national regulator. Under EMIR, the national regulator must seek an Opinion from ESMA before making a final exemption decision. ESMA, in turn, must consult with the European Insurance and Occupational Pensions Authority before issuing its Opinion. The FCA has now granted exemptions and ESMA will publish the list of the types of entities that have been given exemptions in the near future. This follows on from the transitional exemption period for pension funds from the clearing obligation having been extended to August 16, 2017. Pension funds must comply with the EU clearing obligation by this date under EMIR.
 
View ESMA's press release and Opinions.

 
The European Banking Authority published a letter dated December 18, 2015 addressed to the European Commission in which the EBA requests delays to the dates by which the EBA is required to prepare technical standards and reports under the Capital Requirements Directive, the Capital Requirements Regulation, the EU Bank Recovery and Resolution Directive, the European Market Infrastructure Regulation and the Credit Rating Agencies Regulation. The EBA states that for the most part it has not been able to deliver its mandates according to deadlines due to a persistent shortage in resources and the need to prioritize other workstreams. The EBA invites the Commission to request the EBA to fulfil its mandates  within new time limits.
 
View the EBA's letter.

The US Commodity Futures Trading Commission announced the signing of a Memorandum of Understanding with the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and Deutsche Bundesbank (Bundesbank) regarding cooperation and the exchange of information in the supervision and oversight of clearing organizations that operate in the United States and in Germany.

The MOU signifies a willingness among the CFTC, the BaFin, and the Bundesbank to collaborate in order to fulfill their respective regulatory mandates with respect to cross-border clearing organizations in the United States and Germany. The MOU accompanies the CFTC’s decision to grant Eurex Clearing AG registration as a derivatives clearing organization. 

View the MOU.
 

The European Securities and Markets Authority published the Memoranda of Understanding it entered into with the Financial Services Board of South Africa and the Comisión Nacional Bancaria y de Valores of Mexico. The MoUs are established further to the European Markets Infrastructure Regulation, under which ESMA is required to set out cooperation arrangements with non-EU authorities whose legal and supervisory framework for non-EU CCPs are deemed to be equivalent to European requirements. The MoUs provide ESMA with the tools to monitor the ongoing compliance of non-EU CCPs with the recognition conditions under EMIR. The MoUs are effective from November 30, 2015 and January 25, 2016 respectively.
 
View the South African MoU.
 
View the Mexican MoU.

The US Commodity Futures Trading Commission granted permanent registration to 18 Swap Execution Facilities that trade interest rate swaps and credit default swaps, all of which were previously operating under temporary registration status. The SEFs approved for registration are: 360 Trading Networks Inc.; BGC Derivatives Markets, L.P.; Bloomberg SEF LLC; Chicago Mercantile Exchange Inc.; DW SEF LLC; GFI Swaps Exchange LLC; ICAP Global Derivatives Limited; ICAP SEF (US) LLC; ICE Swap Trade, LLC; Javelin SEF, LLC; LatAm SEF, LLC; MarketAxess SEF Corporation; SwapEx, LLC; Thomson Reuters (SEF) LLC; tpSEF Inc.; Tradition SEF, Inc.; trueEX LLC; and TW SEF LLC. The CFTC continues to review the registration of five remaining SEFs that are currently operating under temporary registration status. 

View more information regarding the CFTC-registered SEFs. 

The US Commodity Futures Trading Commission launched a new website to provide the public with information about whistleblower rights and protections, and to allow the public to submit tips about potential violations of the Commodity Exchange Act via the website. The website guides users through filing a tip and applying for an award and contains accessible information about the rules and regulations governing the CFTC’s Whistleblower Program and related updates.

View the CFTC press release. 

View the program website. 

The European Systemic Risk Board published a report on the systemic risk implications of CCP interoperability arrangements which are governed by the European Market Infrastructure Regulation. There are currently five interoperable links in operation in the EU, including four authorized EU CCPs, a Swiss CCP and its Norwegian branch. The ESRB considers that the EU's current regulatory framework for interoperability is sound. However, the ESRB recommends that: (i) more regulatory granularity should be included in the framework to provide clarity for supervisors and regulators, to avoid regulatory arbitrage and to ensure a harmonized EU approach; (ii) the expected proposed legislation on CCP recovery and resolution should clarify the interaction of an interoperability arrangement with the default waterfall framework as well as portability and other default management measures; (iii) further analysis of the risks involved in interoperable arrangements for derivatives should be carried out; and (iv) the ESRB should be given a consultative role on the future development of any guidelines and rules on interoperability. The European Securities and Markets Authority recommended in February 2015 that the interoperability provisions in EMIR, which are limited to transferable securities and money-market instruments, should not be extended to OTC derivatives but could be extended to Exchange-Traded Derivatives. The European Commission must take the ESRB and ESMA reports into account when it prepares its report to the European Parliament and Council on the issue.
 
View the ESRB report.

The US Commodity Futures Trading Commission’s Division of Market Oversight extended no action relief originally provided in CFTC Letter 13‑41, which was issued on June 28, 2013. CFTC Letter 13-41 permits Part 45 and Part 46 reporting counterparties to mask legal entity identifiers, and certain other enumerated identifiers and identifying terms, and permits Part 20 reporting entities to mask identifying information, in required reports in light of privacy, secrecy and blocking laws in certain jurisdictions. The CFTC previously extended this relief through CFTC Letter 15-01, and is now further extending relief, subject to certain conditions, until the earlier of March 1, 2017 and the date that the reporting party no longer holds the requisite reasonable belief that privacy law bars reporting. 

View the CFTC press release. 

The US Commodity Futures Trading Commission issued an order under the Commodity Exchange Act delegating to the National Futures Association certain reporting and administrative responsibilities, effective March 1, 2016. The NFA will receive, review and maintain notices of swap valuation disputes in excess of $20 million USD filed by swap dealers and major swap participants pursuant to CFTC regulation 23.502(c). The NFA will also be responsible for providing summaries and periodic reports related to these notices to the CFTC. The NFA is not authorized to render “no-action” positions, exemptions or interpretations with respect to applicable disclosure, reporting, recordkeeping and registration requirements.

View the order. 

The US Commodity Futures Trading Commission proposed a rule offering an alternative to the requirement for foreign natural persons to provide fingerprints when applying for CFTC registration. The proposal provides that any such person’s registered firm may complete a criminal history background check instead of submitting fingerprints. The proposal generally codifies CFTC Staff Letters 12-49 and 13-29 and would supersede those letters, if adopted. Comments on the proposed rule are due on or before February 11, 2016. 

View the CFTC press release. 

View the proposed rule. 

The Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions published proposed guidance on the Unique Product Identifier which will allow for the identification of OTC derivatives products that authorities require, or may require in the future, to be reported to trade repositories.  The UPI is made up of an OTC derivatives products classification system and an associated code (i.e. how the UPI will be represented in trade reports). A separate consultation will be launched on the code at a later date. Currently, OTC derivative trades are reported to 20 trade repositories authorized for some asset classes. However, in order to properly mitigate systemic risk and protect against market abuse, it is necessary for data across trade repositories to be aggregated so that national regulators have a comprehensive view of the OTC derivatives markets and trading activity. The CPMI and IOSCO have been tasked by the Financial Stability Board with developing global guidance on the harmonization of data elements reported to trade repositories, including a Unique Transaction Identifier and a UPI. The CPMI and IOSCO are proposing principles and high-level business specifications for the UPI as well as two approaches for the granularity of the UPI classification system. In particular, feedback is sought on potential implementation challenges. The consultation closes on February 24, 2016.

View the consultation paper.

The International Swaps and Derivatives Association, Inc., the Managed Funds Association and the Asset Management Group of the Securities Industry and Financial Markets Association announced that 25 buy-side firms had voluntarily committed to clearing their single-name credit default swap trades through central counterparties. Clearing of such trades will be the priority with existing positions being migrated over time. The firms are: AB, Anchorage Capital Group, Apollo Global Management, LLC, AQR Capital Management, LLC, BlackRock Inc., BlueMountain Capital Management, LLC, Brigade Capital Management, Citadel LLC, Claren Road Asset Management, LLC, Cyrus Capital Partners, LP, DCI, LLC., DW Partners, LP, Eaton Vance Management, Field Street Capital Management, LLC, Gracie Asset Management, Hutchin Hill Capital LP, Kingdon Capital Management, LLC, Marathon Asset Management, LP, MKP Capital Management, LLC, Och-Ziff Capital Management Group, PIMCO, Pine River Capital Management, Saba Capital Management, L.P., UBS O’Connor LLC and Zais Group, LLC.

View the announcement.

The European Securities and Markets Authority published a consultation paper on a review of the Regulatory Technical Standards for CCPs on the time horizons for the liquidation period for margin held by CCPs for exchange-traded derivatives. The RTS currently specify a two-day time horizon as the liquidation period used in the time horizons for margin calculations, across all CCP accounts for exchange-traded products.  The original RTS use this two-day liquidation period but based on net margin models, where offsetting positions of different customers cancel one another out. A key economic difference has been noted between the US and EU regimes for CCP margins, in that the US only requires a one day liquidation period but is calculated on a gross basis across all customer positions. A degree of harmonization of the two regimes is proposed to assist the EU in adopting a long-awaited equivalence decision for US CCPs under EMIR, with proposed adoption of the alternative of a “one day gross” model for European CCP customer accounts. The two-day standard for clearing members' house accounts and the five-day liquidation period for OTC products would be retained. The consultation follows on from ESMA's discussion paper published in August 2015. Comments are due by February 1, 2016.
 
View the consultation paper.

​The US Securities and Exchange Commission issued a proposed rule for public comment that would limit the use of derivatives and require new risk management measures by registered investment companies, including mutual funds, exchange-traded funds, closed-end funds, and business development companies. The proposed rule would require a fund to comply with one of two portfolio limitations, that would cap the amount of leverage a fund may obtain  from derivatives and other specified transactions. Specifically, the rule would limit a fund’s aggregate derivatives exposure to 150 percent of the fund’s net assets, or up to 300 percent of the fund’s net assets provided that the fund satisfies a risk-based test based on value-at-risk. A formal derivatives risk management program overseen by a designated derivatives risk manager would be required if a fund engages in more than the limited amount of derivatives transactions or if it uses complex derivatives. In addition, a fund would have to manage the risks related to their use of derivatives by segregating certain assets, generally cash and cash equivalents, in an amount sufficient to ensure that the fund meets its obligations. Funds would also be required to segregate certain assets to cover its obligations related to certain financial commitment transactions, such as reverse repurchase agreements and short sales. The proposed rule will be open for public comment for 90 days following its publication in the Federal Register.

View the SEC press release.

View the proposed rule.

The European Securities and Markets Authority launched a consultation on revised Regulatory Technical Standards on data access and operational standards for comparison and aggregation of data under the European Market Infrastructure Regulation. ESMA is proposing to revise the existing RTS to take into account both practical developments and international developments.  It will also address certain structural deficiencies in data access which have resulted in an inability of regulators to perform adequate systemic risk assessments.  Particular targets of concern are low quality data, limited capabilities for data querying and for access to large datasets, difficulties in aggregating and comparing data across trade repositories due to lack of standardization and difficulties in obtaining real direct and immediate access to trade repository data. ESMA is therefore proposing: (i) common provisions for operational standards for aggregation and comparison of data; (ii) common output formats; and (iii) common provisions for operational standards for access to data and data exchange procedures between trade repositories and national regulators. The consultation closes on February 1, 2016.

View the consultation paper.

​The US Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued a no-action letter extending relief previously issued in CFTC Staff Letter No. 14-147. CFTC Staff Letter No. 14-147, which was set to expire on December 31, 2015, provides that commodity trading advisers that are registered with the CFTC, and are members of designated contract markets or swap execution facilities, are not required to record oral communications under CFTC Rule 1.35(a). In addition, the no-action letter exempts market participants covered by Regulation 1.35 from having to link records of oral and written communications that lead to the execution of a transaction with any particular transaction. The extended relief will continue until the effective date of any CFTC action with respect to the CFTC’s pending proposal to amend Rule 1.35(a).

View CFTC Staff Letter No. 14-147.

A Delegated Regulation which gives effect to the EU clearing obligation for Interest Rate Swaps was published in the Official Journal of the European Union. Under the Delegated Regulation, fixed-to-float IRS, known as plain vanilla IRS derivatives, float-to-float swaps, known as basis swaps, forward rate agreements and overnight index swaps denominated in euro, pounds sterling, Japanese yen or US dollars and entered into with an EU counterparty must be cleared through a CCP. The obligation will be phased in according to counterparty type to allow market participants time to determine if the obligation applies to them and set up procedures to ensure compliance: (i) from June 21, 2016: clearing members for at least one of the relevant classes of IRS of at least one CCP authorized or recognized to clear one of those classes; (ii) December 21, 2016: FCs and alternative investment funds belonging to a group whose group aggregate month end average of outstanding notional amount of non-centrally cleared derivatives for the three months following the Delegated Regulation entering into force is above €8 billion; (iii) from June 21, 2017: FCs and AIFs not in either category (i) or (ii) above; and (iii) from December 21, 2018: NFCs subject to the clearing obligation that are not in any of the above categories.
 
View the Regulation.

You may wish to read our updated client note which is available here.

The US Commodity Futures Trading Commission approved proposed rules, known collectively as Regulation Automated Trading (or otherwise known as Regulation AT), that aim to implement risk controls, transparency measures, and other safeguards to enhance regulation of automated trading on US Designated Contract Markets. The proposed risk controls, including maximum order message and size parameters, standards for development, testing and monitoring of algorithmic trading systems, among other requirements, would apply to: (i) market participants using algorithmic trading systems, referred to as “AT Persons” in the proposed rules; (ii) clearing member Futures Commission Merchants with respect to their AT Person customers; and (iii) DCMs executing AT Person orders. Regulation AT would require submission of reports on risk controls, as well as maintenance of books and records regarding such risk controls and other algorithmic trading procedures, by AT Persons and clearing member FCMs for review by DCMs. The proposed rules would also require registration of persons engaged in significant proprietary algorithmic trading in key products through direct electronic access to a DCM who are not currently registered with the CFTC. Regulation AT is intended to include greater transparency around DCM trade matching platforms and promote use of self-trade prevention tools by market participants on DCMs. 

View the press release.

View the proposed rulemaking.

The European Securities and Markets Authority announced that it was not going to further extend the exemption for non-financial counterparties from the obligation to provide collateralized bank guarantees for their energy derivatives cleared by EU CCPs. Therefore, from March 15, 2016, CCPs authorized under the European Market Infrastructure Regulation must fully collateralize commercial bank guarantees used to cover transactions in derivatives relating to electricity or natural gas produced. Non-financial counterparties have had a three year grace period to ensure that they will be able to comply with the collateral obligations under EMIR which requires CCPs to only accept highly liquid collateral with minimal credit and market risk.  
 
View ESMA's announcement. 

Five equivalence decisions on the regulatory regimes for CCPs under the European Market Infrastructure Regulation were published in the Official Journal of the European Union. These relate to Canada, Mexico, South Korea, South Africa and Switzerland. The legal and supervisory arrangements of these jurisdictions are considered to be equivalent to the requirements set out in EMIR. Equivalence decisions for CCP regimes have previously been given only for Australia, Hong Kong, Singapore and Japan. A decision for the US is still outstanding due to the differing margin requirements for exchange-traded derivatives.
 
View the equivalence decision for Canada.
 
View the equivalence decision for Mexico.
 
View the equivalence decision for South Korea.
 
View the equivalence decision for South Africa.
 
View the equivalence decision for Switzerland.

The European Securities and Markets Authority published proposed draft technical standards that will amend the existing Commission Delegated Regulation on the minimum details of data to be reported to trade repositories and the Implementing Regulation on the format and frequency of trade reports to trade repositories. ESMA consulted on these changes in November 2014. ESMA considers that the current standards should be updated to incorporate the feedback and Q&As during implementation of the reporting requirement under the European Market Infrastructure Regulation since 2013. The changes are mainly related to clarifying data fields and/or their description, amending existing fields so that they reflect reporting logic in existing Q&As and introducing new fields to reflect market practice. ESMA has also aimed to align reporting requirements under EMIR with those under the Markets in Financial Instruments Regulation, so as to minimize the burden on those entities that are required to report under both regimes. The changes include: (i) allowing the use of multiple reports for the reporting of complex derivatives provided that counterparties agree the number of reports to be submitted; (ii) adding a definition for the notional amount of a derivative; and (iii) amending the fields for reporting of collateral to, amongst other things, split the value field into initial margin posted and variation margin posted. The proposed draft technical standards have been sent to the European Commission for endorsement. ESMA proposes that the standards would only apply nine months after they come into force.

View ESMA's press release. 

The European Securities and Markets Authority published a final report setting out additional final draft Regulatory Technical Standards on the clearing obligation, in particular, the central clearing of interest rate OTC Derivatives in additional currencies. The additional final draft RTS propose a clearing obligation for fixed-to-float Interest Rate Swaps as well as forward rate agreements denominated in Norwegian Krone (NOK), Polish Zloty (PLN) and Swedish Krona (SEK). ESMA considers that because substantial trading volumes exist in these currencies, such contracts are of significant systemic relevance for the EU as well as to specific local markets and the addition of these classes to the clearing obligation will play an important role in reducing systemic risk. ESMA has already deemed IRS denominated in Euros (EUR), Great British Pounds (GBP), Japanese Yen (JPY) and United States Dollars (USD) eligible for mandatory clearing, for which RTS have already been endorsed by the European Commission and central clearing is expected to begin in mid-2016. ESMA has submitted the additional final draft RTS to the European Commission for endorsement.
 
View the final report.

The European Securities and Markets Authority published a consultation paper on draft Regulatory Technical Standards for Indirect Clearing Arrangements relating to OTC derivatives under the European Market Infrastructure Regulation and on Exchange-Traded Derivatives under the Markets in Financial Instruments Regulation. Indirect clearing is a situation where a person accesses clearing through two or more layers of intermediation, i.e. both a clearing member and another intermediary such as a regional bank or affiliate. The draft RTS on ICAs developed under MiFIR included rules for ETDs and a separate RTS under EMIR applies to OTC derivatives. A draft new RTS under EMIR is proposed. Both RTS aim to resolve well-known market difficulties resulting from the incompatibility of existing RTS with insolvency laws and current market practice. There are proposals for persons using indirect clearing to have a choice of separate net margined or gross margined accounts at clearing house level.  The requirements for "leapfrog" payments to be made by clearing members, bypassing insolvent intermediaries, are to be watered down considerably, due to concerns around conflicts with insolvency laws. New proposals are made for chains involving more than one intermediary. Both sets of draft RTS are included in the annexes of the consultation paper. Following the consultation period and any changes resulting from it, ESMA would submit new RTS to the European Commission. Comments are due by December 27, 2015.  
 
View the consultation paper.  

The US Commodity Futures Trading Commission’s Division of Market Oversight extended time-limited no-action relief to Swap Execution Facilities from certain requirements in the definition of “block trade” in CFTC Regulation Section 43.2. Section 43.2 includes in its definition of “block trade,” a publicly reportable swap transaction that “occurs away” from a registered SEF’s trading system and executed according to the SEF’s procedures. The No-Action Letter extends time-limited relief to SEFs from the “occurring away” requirement until November 15, 2016. Overall, the extension will allow the CFTC continued time to monitor and evaluate SEF trading practices, specifically in regards to pre-execution credit checks. It will also allow the CFTC time to evaluate best practices and create a more comprehensive permanent solution for screening block trade orders for compliance with risk-based limits. 

View the press release. 

View CFTC Staff Letter 15-60. 

The Farm Credit Administration, the FDIC, the Federal Housing Finance Agency, the Federal Reserve Board and the Office of the Comptroller of the Currency jointly issued a final rule establishing margin requirements for uncleared swaps. The FDIC and OCC had previously approved the final rule on October 22, 2015. The rule will apply to swap dealers, security-based swap dealers, major swap participants and major security-based swap participants supervised by the aforementioned agencies and registered with the US Commodity Futures Trading Commission or the Securities and Exchange Commission. Sections 731 and 764 of the Dodd-Frank Act require the agencies to establish capital and margin requirements for registered swap dealers, major swap participants, security- based swap dealers and major security-based swap participants in order to address the risks to such entities and the financial system from non-cleared derivatives. Specifically, the final rule requires that initial and variation margin be exchanged between covered swap entities and certain counterparties in connection with non-cleared swaps and security- based swaps. The rule also specifies how margin is to be calculated, what types of margin are eligible and how margin is to be held. Additionally, the agencies approved an interim final companion rule to the joint final rule establishing swap margin requirements.

View the final rule.

View the interim final rule.

View the OCC press release.

The European Securities and Markets Authority published translations of its Guidelines on the application of the definition of commodity derivatives under the Markets in Financial Instruments Directive (known as MiFID I). The guidelines aim to provide a common, uniform and consistent application of the definition of commodity derivatives. There is no commonly adopted definition of derivatives in the EU under MiFID I and ESMA was concerned that this would lead to the inconsistent application of the European Market Infrastructure Regulation where it refers to the MiFID commodity derivatives definition. The Guidelines are also relevant to the reporting obligations under the Regulation on wholesale energy market integrity and transparency, known as REMIT.  The Guidelines also aim to ensure continuity when MiFID II replaces MiFID I from January 3, 2017. The Guidelines were initially published on May 6, 2015 with ESMA's final report and feedback and applied from August 7, 2015.

View the Guidelines.

The US Commodity Futures Trading Commission’s Division of Market Oversight extended existing time-limited no-action relief for swaps executed as part of certain package transactions  that currently receive relief from the requirement that such swaps be executed on a Designated Contract Market or Swap Execution Facility under CFTC Letter 14-137, which was issued in November 2014.

In the CFTC no-action letter, the CFTC found that requiring certain package transactions be executed on a SEF or DCM still presents challenges to both counterparties as well as to SEFs and DCMs. Because many of the challenges previously necessitating no-action relief for certain package transactions have still not yet been resolved, the CFTC is extending relief from the trade execution requirement to enable market participants to continue to execute certain package transactions in a flexible manner.

In a statement issued concurrently with the no-action letter, CFTC Commissioner J. Christopher Giancarlo criticized this fourth extension of no-action relief, noting that the need for repeated extensions proves that the CFTC’s efforts to force certain complex package transactions to trade via a SEF’s limited execution methods is “simply not workable.” In the statement, Commissioner Giancarlo expressed support instead for allowing SEFs flexibility to implement the execution methods currently used to trade package transactions in global markets.

View the press release. 

View CFTC Staff Letter 15-55.

The European Securities and Markets Authority sent a letter to Jonathan Hill, Commissioner for Financial Stability, Financial Services and Capital Markets Union at the European Commission on the Regulatory Technical Standards for indirect clearing for OTC derivatives under the European Market Infrastructure Regulation and the draft RTS on exchange-traded derivatives under the Markets in Financial Instruments Regulation. Both the final RTS under EMIR and the draft RTS under MiFIR aim to specify the types of indirect contractual arrangements that do not increase counterparty risk. Under MiFIR, the draft RTS on indirect clearing must be consistent with the RTS under EMIR. ESMA considers that the RTS under EMIR need to be revised to take into account the feedback received on the proposed draft RTS under MiFIR.  ESMA therefore intends to consult on the possible changes to the EMIR RTS to align them with the draft MiFIR RTS. ESMA will submit the draft MiFIR RTS and draft amended EMIR RTS to the European Commission together, following its consultation.

View the letter.

The European Securities and Markets Authority published its final report and final draft Regulatory Technical Standards on the clearing obligation for certain classes of credit derivatives. Under the European Market Infrastructure Regulation, ESMA is required to develop draft RTS setting out the OTC derivatives that should be subject to the clearing obligation, the date/s from which the obligation should apply and the minimum remaining maturity of OTC derivatives. The final draft RTS provide for the following two iTraxx Index CDS to be subject to the clearing obligation: (i) untranched iTraxx Index CDS (Main, EUR,5Y); and (ii) untranched iTraxx Index CDS (Crossover, EUR,5Y). ESMA has to a large extent adopted the same approach that it took for the RTS on the clearing obligation for IRS (which the European Commission adopted on August 6, 2015). The final draft RTS on the clearing obligation for CDS provide for the same categories of counterparties to be subject to the CDS clearing obligation as will be subject to the IRS clearing obligation. Similarly, the obligation for the different counterparties will be phased in according to counterparty type.  ESMA has submitted the final draft RTS on a clearing obligation for CDS to the European Commission for endorsement.

View the final draft RTS on a clearing obligation for CDS.

The US Commodity Futures Trading Commission’s Division of Market Oversight issued a no-action letter, CFTC Letter No. 15-52, that provides additional time for reporting parties to comply with certain reporting requirements of the ownership and control final rule (OCR Final Rule). The OCR Final Rule introduces to the CFTC’s transaction and reporting program certain new and updated forms for reporting trader identification and market participant data. CFTC Letter No. 15-52 supersedes previous no-action relief issued in February 2015, and extends relief until April 2016, September 2016, or February 2017, depending on the type of reporting requirement.

View the press release.

View CFTC Letter No. 15-52.

The US Commodity Futures Trading Commissioin issued an Order filing and settling charges against TeraExchange LLC, a provisionally registered Swap Execution Facility. TeraExchange was charged for failing to enforce a prohibition on wash trading and prearranged trading on the SEF platform in connection with the SEF's offering for trade of a non-deliverable forward contract based on the relative value of the US Dollar and Bitcoin. TeraExchange is required to cease and desist from future violations regarding trade practices.

View the CFTC press release.
 

The US Commodity Futures Trading Commission approved for public comment a supplement to its November 2013 proposed rulemaking to modify the policy for aggregation under the CFTC's position limits regime for futures and option contracts in Part 150 of its regulations. The supplemental notice of proposed rulemaking revises how the CFTC proposes to address situations when an exemption from the aggregation requirement is available for owners of greater than 50 percent interest in another entity. Under the November 2013 proposal, owners of a greater than 50 percent interest would have to provide specified information and certifications in an application to the CFTC, and obtain CFTC approval before disaggregating their positions. Under the supplement, owners of a greater than 50 percent interest would follow the same procedures that were proposed for owners of an interest between 10 and 50 percent, which procedures would permit such owners to disaggregate an owned entity's positions upon filing a notice with the CFTC stating that certain specified standards have been met. All other aspects of the November 2013 proposal remain the same. The CFTC continues to consider the November 2013 proposal and the comments submitted during the earlier comment periods.

View the press release.
View the CFTC proposed rule.
 

The US Commodity Future Commission's Division of Market Oversight and Division of Clearing and Risk jointly published an interpretive letter stating that the use by a DCO of a "firm or forced trades" process to determine the price of certain swaps for which public market prices are not available, does not, by itself, trigger the requirement for the DCO to register as a swap execution facility.

In addition, the CFTC interpretive letter states that the DCO should be the reporting counterparty for swaps created by the firm or forced trades process for purposes of Part 45 of the CFTC's regulations.

View the CFTC Staff Letter.

The US Commodity Futures Trading Commission’s Division of Clearing and Risk released an interpretation clarifying the consistency of the CFTC’s Part 39 regulations pertinent to certain derivatives clearing organizations with the CPMI-IOSCO Principles for Financial Market Infrastructures. The clarification relates to certain risk management standards which, among other things, address risks associated with the following: exchange-of-value settlement services; link arrangements of DCOs; the requirement to use central bank services, where available and practicable; and requirements regarding the due diligence conducted with respect to custodian banks.

In the guidance, the CFTC interprets the relevant Part 39 regulations, which apply to systemically important DCOs and those DCOs that have opted into an enhanced regulatory framework (known as Subpart C DCOs), to incorporate all of the standards set forth in the PFMIs.

View the CFTC Staff Interpretation.