The International Swaps and Derivatives Association, Inc. announced the launch of a new industry data project which will develop an open-source standard derivatives product identification system that can be applied across different types of financial market infrastructure, such as trading venues, clearing houses and trade repositories. The initiative is in response to the derivatives reporting requirements which are imposed in various jurisdictions, including the US and EU. ISDA's new Symbology Governance Committee will provide oversight and governance to ensure that the product identification standard meets both industry and regulatory requirements. Eighteen entities (subject to finalization of contracts), have signed up to the project so far.

View ISDA's press release.

The US Commodity Futures Trading Commission announced proposed amendments to the definition of “material terms” in connection with CFTC regulations relating to swap portfolio reconciliation.
 
CFTC regulations on swap portfolio reconciliation require swap dealers and major swap participants to reconcile swap terms with other SDs or MSPs daily, weekly, or quarterly, depending upon the size of the particular swap portfolio. These regulations also require SDs and MSPs provide non-SD and non-MSP counterparties with regular opportunities for portfolio reconciliation.
 
Under the new proposal, the CFTC would amend the definition of “material terms” to specifically exclude certain data fields from the periodic reconciliation requirements. If the proposed amendment to the definition of “material terms” is adopted, the proposed rule would supersede no-action relief provided pursuant to CFTC Letter 13-31 issued on June 26, 2013.  
 
In separate statements, CFTC Commissioner J. Christopher Giancarlo and CFTC Chairman Timothy Massad praised the proposal for eliminating unnecessary burdens in the swap portfolio reconciliation rules. In addition, Commissioner Giancarlo encouraged parties affected by the swap reconciliation rules to submit comments regarding the ongoing costs associated with the reconciliation of other data fields that may not be relevant to the ongoing rights and obligations of the parties to a swap.
 
The comment period ends 60 days after the proposal’s publication in the Federal Register.
 
View the CFTC proposed rule.
 

A Commission Delegated Regulation was published in the Official Journal of the European Union which extends the transitional exemption period under the European Market Infrastructure Regulation for pension funds to comply with the EU clearing obligation by two years. The European Commission announced on June 5, 2015, that the period would be extended from August 16, 2015 to August 16, 2017, noting that if pension funds were subject to the clearing obligation now, they would need to source cash for the margin requirements of CCPs. The Commission, and other EU regulators, have asked CCPs to develop a solution that would allow pension funds to clear derivatives without the obligation being too burdensome for pension funds but which will also allow CCPs to liquidate positions rapidly in the event of a default. To date, no solution has been confirmed.

View the Commission Delegated Regulation.

The US Commodity Futures Trading Commission issued a final rule requiring all registered introducing brokers and commodity pool operators, and certain commodity trading advisors, to become and remain members of a registered futures association.  Currently, the only registered futures association is the National Futures Association.  Certain commodity trading advisors who qualify for an exemption from registration as a commodity trading advisor under CFTC regulation 4.14(a)(9) are not subject to this requirement.  Compliance with the final rule is required by December 31, 2015.

View the press release.

View the final rule.

The US Commodity Futures Trading Commission announced the approval of the application of LedgerX LLC for temporary registration as a swap execution facility.  LedgerX is a Delaware limited liability company and wholly-owned subsidiary of NYBX Inc., a corporation based in Delaware.  Following the approval for temporary registration, the CFTC will undertake a further substantive review of the company’s application for full registration. If approved, LedgerX would be the first federally regulated bitcoin options exchange and clearing house that would list and clear fully-collateralized, physically-settled bitcoin options for the institutional market.

View the press release.

The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published a consultative report on the harmonization of a first batch of key OTC derivatives data elements, focusing on key data considered to be important for consistent and meaningful aggregation on a global basis, as OTC derivatives become required to be reported to trade repositories in many jurisdictions globally. The consultation seeks views on matters including: (i) proposed definitions of key data elements; (ii) whether the proposed definitions cover different market practices globally; and (iii) whether any alternative approaches to those mentioned in the report would better achieve the goals of the report. Comments are due by October 9, 2015.

View the report.
 

On August 27, 2015, the US Commodity Futures Trading Commission approved rule amendments and a new interpretive notice filed by the National Futures Association heightening protections for retail customers of NFA Forex Dealer Members. Among other things, the rule amendments (i) impose additional capital requirements on FDMs; (ii) require FDMs to collect security deposits for off-exchange foreign currency transactions from both eligible contract participant counterparties as well as retail counterparties; (iii) require FDMs to adopt and implement more stringent risk management programs; and (iv) require FDMs to provide additional market disclosures and firm-specific information on their websites.

Statements issued by Chairman Timothy Massad and Commissioner Sharon Bowen emphasized the heightened risks faced by retail customers investing in the foreign exchange markets, including the losses retail investors face as a result of minor price movements in the foreign exchange market. In her statement, Commissioner Bowen further stated that the CFTC should consider imposing additional regulations on retail forex dealers, including, but not limited to: (i) imposing concentration charges on RFEDs if they are overly exposed to a particular currency pair or liquidity provider to incentivize RFEDs to balance their, and their retail counterparties’ positions; (ii) requiring that RFEDs get the best possible prices for their retail counterparties; and (iii) requiring or incentivizing RFEDs to clear in order to lower the credit risks that retail foreign exchange investors face.

View the press release.

The European Securities and Markets Authority published a discussion paper on a review of the Regulatory Technical Standards for CCPs on the time horizons for the liquidation period for margin held by CCPs. The RTS currently specify a two-day time horizon as the liquidation period which should be sufficient for a CCP to transfer or liquidate the positions of a defaulting clearing member for exchange-traded derivatives.  Margins are modeled to cover the exposures arising from this time horizon. 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 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. Responses to the discussion paper are due by September 30, 2015. On the basis of feedback, ESMA may prepare revised draft RTS for public consultation. 

View the discussion paper and response form. 
 

The European Central Bank published a report of the European System of Central Banks, which is comprised of the ECB and the national central banks of all EU Member States, on whether a measure should be included in the European Market Infrastructure Regulation which would facilitate the access of CCPs to central bank liquidity facilities. The report is required as part of the European Commission’s Review of EMIR. Under EMIR, there are no requirements for the provision of central bank liquidity facilities to CCPs.  The decision whether to offer such facilities is left to each central bank’s discretion. This framework is in line with the Treaty on the Functioning of the European Union and the Statute of the ESCB. The ESCB does not consider that introducing requirements in EMIR for CCP access to central bank facilities is appropriate to address any potential weaknesses and concludes that the current legal framework is sufficient to ensure access for CCPs to liquidity facilities offered by central banks.

View the report.

On August 19, 2015, the US Commodity Futures Trading Commission proposed amendments to existing regulations in order to provide further clarity to swap counterparties and registered entities concerning their reporting obligations for cleared swap transactions. In addition, the proposed amendments are intended to improve the efficiency of data collection and maintenance associated with the reporting of the swaps involved in a cleared swap transaction.

Among other things, the proposed rules are intended to provide clarity as to which counterparty to a swap is responsible for reporting creation and continuation data for certain swap transactions, including clarification as to whose obligation it is to report the extinguishment of a swap upon its acceptance by a derivatives clearing organization for clearing. The CFTC believes the proposed rules will reduce the probability of double-counting notional exposures and improve the capability to trace the history of a cleared swap transaction from execution between the original counterparties to clearing.

The proposed rule would modify Part 45 of the CFTC’s regulations, which the CFTC adopted on December 20, 2011. The comment period ends 60 days after the publication in the Federal Register.

View the press release.

The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions launched a consultation aimed at developing guidance for a uniform global unique transaction identifier. The development of a UTI was identified in September 2014 by the Financial Stability Board as one of the critical elements for a mechanism to produce and share global aggregated derivatives reporting data, along with the development a unique product identifier and the harmonization of certain other key data elements. Numerous countries have implemented legislative and regulatory requirements for the reporting of OTC derivatives aimed at improving transparency, mitigating systemic risk and preventing market abuse. To date 26 trade repositories have been established in 16 jurisdictions. The aggregation of data from those trade repositories is key to giving authorities a comprehensive view of the OTC derivatives market and activity and the purpose of the global UTI would be to uniquely identify each OTC derivative transaction required by authorities to be reported to trade repositories. The CPMI and IOSCO are seeking feedback that will assist in developing guidance on a UTI definition, the structure and format of a UTI and responsibility for generating a UTI. Implementation of the final guidance will be the subject of further work by the FSB. The consultation closes on September 30, 2015.

View the consultation paper.

The US Commodity Futures Trading Commission issued a time-limited no-action letter, again extending relief to non-US swap dealers registered with the CFTC from certain transaction-level requirements under the Commodity Exchange Act. This extension builds on similar relief previously granted by the CFTC in 2014 and provides that the CFTC will not take an enforcement action against non-US swap dealers for failure to comply with the specified transaction-level requirements. Subject to the limitations laid out, the relief is effective until the earlier of September 30, 2016 or the effective date of any CFTC action with respect to relief for non-US swap dealers from certain transaction- level requirements.

View the CFTC press release.

The European Securities and Markets Authority published four reports which make recommendations for improving the framework of the European Market Infrastructure Regulation. The reports provide ESMA’s input into the European Commission’s review of EMIR. ESMA makes the following recommendations, amongst others: (i) streamlining the process for determining clearing obligations; (ii) introduction of a mechanism to temporarily suspend the clearing obligation; (iii) removal of the frontloading requirement; (iv) reconfiguration of the exemptions for intragroup transactions; (v) replacement of the current system for equivalence determinations for third country CCPs with a system based on Regulatory Technical Standards which includes powers to deny or suspend the recognition of a third country CCP; (vi) clarification of when new activities and services are not covered by a CCP’s initial authorization; (vii) granting ESMA increased supervisory and enforcement powers over trade repositories; (viii) the identification of quasi-financial entities, for example, hedge funds or some alternative investment funds, to prevent confusion with other non-financial counterparties, such as corporates; (ix) further details on the rules for implementing the counter-cyclical tools adopted by CCPs for margins and collateral; and (x) clarification of the provisions on segregation and portability by RTS.

View the ESMA reports.

The International Organization of Securities Commissions published its final report on post-trade transparency in the Credit Default Swaps market. The report discusses the impact of mandatory post-trade transparency in the CDS market generally, including the disclosure of price and volume of individual transactions. The report states that member jurisdictions should take further steps, including adopting legislation or implementing other legal powers where necessary, to enhance post-trade transparency in the CDS market.

View the report.

The European Commission announced that it had adopted legislation which, once it comes into force, will make it mandatory to clear certain OTC interest rate swaps through CCPs. The obligation will apply to 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 which are denominated in euro, pounds sterling, Japanese yen or US dollars. The legislation is now subject to scrutiny by the European Parliament and the Council of the European Union. Mandatory clearing of these derivatives contracts represents the first mandatory clearing obligation under the European Market Infrastructure Regulation. It is expected that the European Securities and Markets Authority will in the near future propose mandatory clearing obligations for other types of OTC derivatives.

View the announcement.

View the Shearman & Sterling client note, "EU Clearing Obligation for Interest Rate Swaps Looms".

The US Securities and Exchange Commission adopted final rules under Dodd-Frank providing for the registration of security-based swap dealers and major security-based swap participants. Under the final rules, security-based swap dealers and major security-based swap participants, collectively referred to as SBS Entities, will be granted conditional registration status after filing an application with the SEC and providing certain senior officer certifications, pending the SEC’s review of the application. The SEC will then review the application to either grant ongoing registration or institute proceedings to deny registration to the SBS Entity. The registration process requires the submission by an SBS Entity of information about its business activities, structure and background as well as information about their control affiliates. Although the final rule will become effective 60 days after publication in the Federal Register, the compliance date for the final rules will depend on the timing of implementation of certain other security-based-swap-related final rules.

Additionally, on August 5, 2015, the SEC issued proposed rules, which would provide a process for a registered SBS Entity to apply to the SEC for an order permitting the SBS Entity to continue effecting security-based swaps through an associated person who is subject to a statutory disqualification. The SEC may issue an order granting such relief if it would be consistent with the public interest to permit such a person to be engaged in effecting security-based swaps notwithstanding the statutory disqualification. Comments on the proposed rule are due 60 days after publication in the Federal Register.

View the press release.
 

The US Office of the Comptroller of the Currency issued a bulletin clarifying its expectations regarding the extent to which national banks and federal branches or agencies of foreign banks may make or take delivery of a physical commodity to hedge commodity derivatives risks. Among other things, the bulletin includes guidance on the calculation required to determine whether physical hedging activities are a nominal portion of risk management activities. Pursuant to the OCC bulletin, physical hedging positions are considered "nominal" if the bank’s commodity position is no more than 5 percent of the notional value of the bank’s derivatives that: (i) are in that particular commodity; and (ii) allow for physical settlement within 30 days. The guidance also reiterates the OCC’s expectation that a bank, prior to engaging in physical commodity hedging activities, should submit to the OCC a detailed plan for such activities and receive from the OCC a prior written supervisory nonobjection.

View the OCC bulletin.

The International Organization of Securities Commissions published a report which sets out the findings of its review on the progress by countries in adopting legislation, regulation and policies for derivatives market intermediaries as set out in the IOSCO “International Standards for Derivative Market Intermediary Regulation.” The Standards cover the scope of regulatory reform, registration requirements, capital standards for non-prudentially regulated DMIs, conduct of business standards, business supervision standards and recordkeeping standards. The review found that most jurisdictions are in the process of implementing legal frameworks which cover the same areas as the Standards and recommends that an implementation assessment need not be undertaken before the end of 2016.

View the Report.

The European Systemic Risk Board published two reports on issues to be considered in the review of the European Market Infrastructure Regulation which the European Commission is responsible for conducting by August 17, 2015. The first report is on the efficiency of margining requirements to limit pro-cyclicality and the need to define additional intervention capacity in the area, focussing on margins and haircut setting for CCPs because the technical standards on margin for uncleared derivatives are not yet final. The second report considers the wider ambit of EMIR. In the reports, the ESRB makes several recommendations to the European Commission for the improvement of EMIR, including: (i) binding guidance on the three options available to a CCP for taking into account potential pro-cyclicality of margin requirements; (ii) a less flexible framework for calibrating collateral haircuts; (iii) that CCPs should be required to prepare an overall tolerance for pro-cyclicality policy and be subject to more granular transparency requirements for pro-cyclicality; (iv) a further review of EMIR in 2018; (v) a swift process for removal or suspension of mandatory clearing requirements; (vi) the replenishment of default funds and the skin-in-the-game design under EMIR and at an international level; and (vii) broader access rights for national regulators to trade repository data.

View the first report.

View the second report.

The Financial Stability Board published its ninth report on the implementation of OTC derivatives reforms. The report notes that implementation of the reforms continues to progress but that challenges do still exist. Issues that are being addressed at international level include harmonization of transaction reporting, a framework for uniform trade and product identifiers, coordination on CCP resilience and cross-border regulatory issues. The FSB will continue to monitor and report on implementation of the reforms including the effects thereof.

View the FSB report.

The EU Agency for the Cooperation of Energy Regulators has announced that it has approved the first five third-party Registered Reporting Mechanisms under the Regulation on wholesale energy market integrity and transparency, known as REMIT. From October 7, 2015, market participants must report their wholesale energy market transactions admitted to trading at Organized Market Places, including orders to trade, to ACER. Market participants must either be approved by ACER as an RRM or report through a third-party RRM to fulfill the obligation. Further reporting obligations come into effect on April 7, 2016, which will require market participants to report OTC standard and non-standard supply contracts and transportation contracts.

View the announcement.

The International Swaps and Derivatives Association published an "EMIR Classification Letter" and related guidance. The Letter is intended to help counterparties to determine and communicate their classification under the European Market Infrastructure Regulation. Under EMIR, the obligations of counterparties to a derivatives transaction are dependent on the classification of each counterparty as either a financial counterparty or a non-financial counterparty. The Letter aims to facilitate that determination by asking a series of questions.

View the Letter and guidance.

The US Commodity Futures Trading Commission’s Division of Market Oversight published an updated Guidebook and Appendices for Part 20 Reports, providing guidance and instructions for the submission of large swaps trader reports to the CFTC in accordance with Part 20 of the CFTC regulations. Among other things, the Part 20 Guidebook includes instructions on reporting formats and record layouts for submitting position reports and examples for converting swaps into futures equivalent units as required under Part 20.

View the CFTC Guidebook for Part 20 Reports.

The European Supervisory Authorities published their second consultation on draft regulatory technical standards on risk mitigation techniques for OTC derivatives not cleared by a CCP. Under the European Market Infrastructure Regulation, counterparties to uncleared OTC derivative transactions are required to implement risk mitigation techniques to reduce counterparty credit risk. This second consultation follows the proposals published in April 2014 and seeks to address the issue of how the requirements would impact firms subject to differing requirements across jurisdictions. The second consultation seeks feedback on a narrower set of issues, including: (i) the treatment of non-financial counterparties established outside of the EU; (ii) the timing of calculation, call and delivery of initial and variation margin; (iii) unintended consequences that might arise due to the design or implementation of initial margin models; (iv) the requirements for trading relationship documentation; (v) the treatment of FX mismatch between collateral and OTC derivatives; (vi) whether allowing cash posted as initial margin to be re-invested will alleviate concerns that the ban on rehypothecation would result in a de facto ban of cash as initial margin; (vii) whether replacing the requirement to obtain legal opinions on the segregation of initial margin with a requirement for counterparties to conduct an internal assessment of the reliability and enforceability of agreements in each jurisdiction is sufficient to ease the burden on counterparties; and (viii) the revised regime for units in UCITS as eligible collateral. Responses to the consultation are due by July 10, 2015. The revised international timeline would apply.

View the Consultation paper.

The US Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight issued no-action relief from introducing broker and commodity trading advisor registration to persons located outside the US that facilitate swap transactions for International Financial Institutions that have offices in the US. The relief granted by the DSIO is consistent with prior treatment of IFIs, including for purposes of the swap dealer definition and mandatory clearing requirements.

The definition of IFIs, for purposes of the no-action letter and in accordance with prior CFTC policy, is limited to certain specified institutions and organizations, including but not limited to, the International Monetary Fund, the International Bank for Reconstruction and Development, the European Bank for Reconstruction and Development and the International Development Association, among others.

View the CFTC Staff Letter 15-37.

The US Commodity Futures Trading Commission’s Division of Market Oversight issued a no-action letter (CFTC Staff Letter 15-38) extending time-limited relief to Swap Dealers and Major Swap Participants from the obligation to report valuation data for cleared swaps. The no-action relief applies to (i) all SDs and MSPs that are reporting counterparties under regulation 45.8, for the purposes of section 45.4(b)(2)(ii) of the CFTC’s regulations, and (ii) all cleared swaps for which the SD or MSP has the obligation to report valuation data under section 45.4(b)(2)(ii).
According to the no-action letter, the DMO will not recommend that the CFTC take enforcement action against an SD or MSP for failing to comply with the requirements of the CFTC’s regulation to report valuation data. 

Originally expiring on June 30, 2015, in accordance with the time-limited relief provided previously in CFTC Staff Letter 14-90, the no-action letter issued on June 15, 2015, extends the relief until June 30, 2016.

View the press release.

View the CFTC Staff letter 15-38.

View the CFTC Staff letter 14-90.

The European Commission announced an extension of the exemption from the clearing obligation for pension funds from August 16, 2015 to August 16, 2017. The announcement was accompanied by a draft Commission Regulation which will, once it has come into effect, amend the European Market Infrastructure Regulation to give effect to the extension. The Commission noted that if pension funds were subject to the clearing obligation now, they would need to source cash for the margin requirements of CCPs. The Commission, and other EU regulators, have asked CCPs to develop a solution that would allow pension funds to clear derivatives without the obligation being too burdensome for pension funds but which will also allow CCPs to liquidate positions rapidly in the event of a default. To date, no solution has been confirmed.

View the draft Commission Regulation.

Following the announcement by the European Commission, that the transitional period for regulatory capital requirements for EU banks’ exposures to CCPs under the EU Capital Requirements Regulation would be extended from June 15, 2015 to December 15, 2015, the Implementing Regulation was published in the Official Journal of the European Union on June 9, 2015. The Implementing Regulation comes into effect on June 12, 2015. The extension is intended to allow further time for CCPs, both from the EU and from non-EU jurisdictions, to become authorized or recognized under the European Market Infrastructure Regulation. One of the requirements for recognition of a third country CCP is that the third country’s regime for supervision of CCPs is deemed to be equivalent to that of the regime under EMIR. Equivalence decisions for CCP regimes have only been given for Hong Kong, Singapore, Australia and Japan. Decisions for major jurisdictions, such as the US, are still outstanding. Authorization or recognition under EMIR will give the CCP the status of being a Qualifying CCP, which is relevant for clearing member firms to calculate their capital requirements for exposures to CCPs under the CRR. Lower capital requirements will be imposed for exposures to a QCCP than for exposures to a non-QCCP CCP.

View the Implementing Regulation.

View our client note on third country equivalence under EMIR.

The European Commission published a consultation document on the review of the European Market Infrastructure Regulation. Under EMIR, the European Commission must submit a report, together with any relevant legislative proposals, by August 17, 2015 to the European Parliament and the European Council, both of which will assess: (i) the potential need for measures to facilitate access by CCPs to central bank liquidity facilities; (ii) the systemic importance of transactions of non-financial counterparties in OTC derivatives and the impact of EMIR on such firms; (iii) the supervisory framework for CCPs; (iv) the efficiency of margining requirements to limit procyclicality and the need to define additional intervention capacity in this area; and (v) the development of CCPs’ policies on collateral margining and their adaptation to the specific activities and risk profiles of their users. The Commission intends to focus only on those aspects of EMIR that have already been implemented, leaving out, for example, the obligation to exchange collateral for non-cleared derivatives. The report will also take into account other issues identified in the implementation of EMIR as well as reports submitted by the European Securities and Markets Authority to the European Commission on, for example, the application of the clearing obligation and the application of the segregation requirements. Feedback on the consultation is due by August 13, 2015.

View the consultation paper.

The European Securities and Markets Authority published an opinion, dated May 7, 2015, on the composition of CCP colleges under the European Market Infrastructure Regulation following the establishment of the Single Supervisory Mechanism and the European Central Bank assuming direct responsibility for prudential supervision of large banks within the SSM. ESMA’s opinion clarifies which authorities qualify as a college member as well as the voting rights that the ECB will hold as a college member.

View ESMA’s opinion.

The US Commodity Futures Trading Commission and the US Securities and Exchange Commission, after consultation with the US Board of Governors of the Federal Reserve System, jointly issued an interpretation concerning forward contracts with embedded volumetric optionality. The interpretation clarifies certain aspects of the original CFTC proposal made in November 2014 and identifies when an agreement, contract or transaction would fall within the forward contract exclusions from the “swap” and “future delivery” definitions in the Commodity Exchange Act, allowing for forward contracts that provide for variations in delivery amount (i.e., contains “embedded volumetric optionality”).

Although the interpretation was issued jointly, it is solely an interpretation of the CFTC and does not apply to the exclusion from the swap and security-based swap definitions for security forwards or to the distinction between security forwards and security futures products.
 

View the CFTC’s Final Interpretation.

View the ‘Fact Sheet’.

The European Securities and Markets Authority launched a consultation on proposed regulatory technical standards on the clearing obligation for additional classes of OTC interest rate derivatives not already included in the first RTS on the clearing obligation for interest rate swaps. The additional classes of OTC interest rate derivatives are those denominated in certain non-G4 European currencies. The additions are: (i) fixed-to-float interest rate swaps denominated in Czech Koruna, Danish Krone, Hungarian Forint, Norwegian Krone, Swedish Krona and Polish Zloty; and (ii) forward rate agreements denominated in Norwegian Krone, Swedish Krona and Polish Zloty. The consultation also includes a summary of the clearing obligation procedure, the structure of the classes of OTC interest rate derivatives and the determination of the classes subject to mandatory clearing. Comments on the proposed RTS should be provided to ESMA by July 15, 2015.

View the consultation paper.

The European Commission and US Commodity Futures Trading Commission published a statement made jointly by Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union, and Timothy Massad, CFTC Chairman. Mr Massad and Commissioner Hill discussed a possible European Commission equivalence decision for CCPs regulated and supervised by the CFTC, and the statement reveals that discussions will continue so that an approach may be finalized by summer 2015.

View the statement.

The CFTC’s Division of Clearing and Risk issued an interpretive letter in response to letters from the Ford Motor Credit Company LLC, among others. The CFTC letter clarifies that a securitization special purpose vehicle wholly-owned by, and consolidated with, an entity as described in Section 2(h)(7)(C)(iii) of the Commodity Exchange Act qualifies as a captive finance company. Captive finance companies, in turn, are eligible to elect the end-user exception from the clearing requirement issued by the CFTC under Section 2(h) of the CEA.

View the press release.

The European Securities and Markets Authority published a list of ten third country central counterparties that have been recognized to offer services in the EU under the European Market Infrastructure Regulation. These third country CCPs are established in Australia, Hong Kong, Japan and Singapore, jurisdictions that are deemed by the European Commission to have legal and supervisory provisions for CCPs equivalent to the regime for EU CCPs under EMIR. The ten CCPs are ASX Clear (Futures) Pty Ltd, ASX Clear Pty Ltd, HKFE Clearing Corporation Limited, Hong Kong Securities Clearing Company Limited, OTC Clearing Hong Kong Limited, SEHK Options Clearing House Limited, Japan Securities Clearing Corporation, Tokyo Financial Exchange Inc, Singapore Exchange Derivatives Clearing Limited and The Central Depository (Pte) Limited. The recognized CCPs will be able to provide clearing services to clearing members or trading venues established in the EU and clearing on these CCPs will satisfy the clearing obligation under EMIR.

View the list of third-country CCPs.

The CFTC’s Division of Market Oversight issued guidance to SEFs concerning the calculation of projected operating costs for the purpose of complying with the financial resource requirements under SEF Core Principle 13 and CFTC Regulation 13.1303. This guidance follows two no-action letters providing relief for erroneous swap trades and swap trade confirmations issued on April 22, 2015. The guidance provides that the cost of variable commissions that a voice-based SEF might pay its employee-brokers does not need to be included in a SEF’s calculation of projected operating costs. However, any fixed salaries or compensation payable to the SEF’s employee-brokers must be included in the calculation of projected operating expenses.

View the CFTC guidance to SEFs.

US and UK regulators imposed fines on Deutsche Bank AG for failings related to EURIBOR and LIBOR (collectively known as IBOR) submissions. The CFTC imposed a financial penalty of $800 million, the US Department of Justice imposed a financial penalty of $775 million on DB Group Services (UK) Limited, a wholly-owned subsidiary of Deutsche Bank, which agreed to plead guilty to wire fraud for its role in manipulating LIBOR, the New York Department of Financial Services imposed a fine of $600 million and the UK FCA imposed a fine of £227 million (circa $340 million). The FCA found that Deutsche Bank had breached several regulatory requirements by attempting to manipulate IBOR rates and improperly influence IBOR submissions and for failing to have proper systems and controls in place. The FCA also fined the bank for the failure by its Managers and Senior Managers to deal with it in an open and cooperative way, for misleading the FCA and for not responding to requests for information timeously and effectively.

The CFTC Order stated that from at least 2005 through early 2011, and across currencies, Deutsche Bank’s submitters routinely took into account other Deutsche Bank traders’ derivatives trading positions, as well as their own cash and derivatives trading positions, when making the bank’s IBOR submissions. Furthermore, Deutsche Bank allowed submitters and traders to prioritize profit motives over appropriate submission considerations, permitted a culture of trader self-interest to exist and created conflicts of interest, which allowed the misconduct to occur.

View the FCA notice.

View the CFTC order.

View the New York Department of Financial Services order.

View the US Department of Justice press release

The US Commodity Futures Trading Commission’s Division of Market Oversight and the Division of Clearing and Risk issued two no-action letters providing certain time-limited relief to swap execution facilities and designated contract markets. CFTC Staff Letter 15-24 provides time-limited relief from certain CFTC regulations to permit SEFs and DCMs to correct clerical or operational errors that may cause a swap to be rejected for clearing and permits counterparties to resubmit the trade with the correct terms. The no-action letter also permits SEFs and DCMs to correct clerical or operational errors revealed after a swap has been cleared. It allows counterparties to execute a trade to offset the cleared trade and submit a new trade with the correct terms. The relief provided is set to expire on June 15, 2016.

CFTC Staff Letter 15-25 extends the time period for relief previously provided in No-Action Letter 14-108, from September 30, 2015 to March 31, 2016, with certain modifications. This Confirmation No-Action Letter provides relief to SEFs from certain requirements concerning trade confirmations required from SEFs for non-cleared swaps. Specifically, it provides relief to SEFs from the requirement to obtain documents that are incorporated by reference in a trade confirmation issued by a SEF, prior to issuing the confirmation. Additionally, the letter relieves SEFs from the requirement to preserve such documents as records.

View CFTC Staff Letter 15-24.

View CFTC Staff Letter 15-25.

The International Swaps and Derivatives Association published a document entitled “Path Forward for Centralized Execution of Swaps.” The Path Forward is a set of principles which aim to promote consistency between the regulatory rules adopted by different jurisdictions for the mandatory trading of derivatives on an exchange or electronic trading platform. ISDA is concerned that market fragmentation will continue and increase if US, European and other regulators do not reconcile their requirements. ISDA suggests that the US regulations are inconsistent with its principles and that changes need to be made to the US trade execution rules for a harmonized international regime to be achieved. The principles are: (i) the trading liquidity of a derivatives contract should be determined by reference to specific objective criteria; (ii) derivatives contracts that are subject to the trading obligation should be able to trade on a number of different types of centralized venues; and (iii) trading venues should offer flexible execution mechanisms that take into account the trading liquidity and unique characteristics of a particular category of swap.

View the Path Forward.

The CFTC issued no-action relief, subject to specified conditions, to provisionally registered swap dealers from compliance with certain CFTC regulations. The regulations relate to business conduct standards with counterparties and swap trading relationship documentation when entering into swaps with certain special purpose vehicles (“SPVs”) in existence prior to October 10, 2013. Such swaps are referred to as “Legacy SPV Swaps” and the documentation governing the Legacy SPV Swaps are referred to as “Legacy SPV Swap Documentation.” As outlined in the request for the no-action relief, SPVs are entities established for very limited purposes and the permitted activities of SPVs, therefore, are significantly limited through covenants contained in their constitutive documents and transaction agreements. Since they are not operating entities, SPVs rely on third-party service providers to satisfy the SPV’s obligations under the Legacy SPV Swap Documentation and the various structured finance transaction agreements. As the specified CFTC regulations were not contemplated or addressed under the Legacy SPV Swap Documentation and related structured finance transaction agreements, there are consequent legal and practical impediments to third-party service providers taking the steps on behalf of SPVs that may be necessary to comply with the regulatory obligations set forth under the CFTC regulations.

In the no-action relief, the CFTC stated that no enforcement action would be taken against swap dealers for failure to comply with certain CFTC regulations as such regulations may apply to a Legacy SPV Swap.
 

View the CFTC Staff Letter 15-21.

The US Commodity Futures Trading Commission issued a no-action letter to futures commission merchants, swap dealers and major swap participants that provides relief from certain requirements under CFTC Regulation 3.3(f). CFTC Regulation 3.3(f) requires FCMs, SDs and MSPs to submit to the CFTC annual reports by Chief Compliance Officers not more than 60 days after the end of their fiscal year. The relief grants FCMs, SDs and MSPs an additional 30 days to provide such annual reports to the CFTC. The relief will remain in effect until the adoption of a rule or rule amendment that modifies the timing requirements of CFTC Regulation 3.3(f)(2) and provides that the CFTC retains the authority to condition further, modify, suspend, terminate, or otherwise restrict the terms of the no-action relief provided, in its discretion.
 

CView FTC Staff Letter No. 15-15.

The International Organization of Securities Commissions and the Basel Committee on Banking Supervision published a revised version of their policy framework regarding minimum standards for margin requirements for non-centrally cleared derivatives. The new framework contains several substantive changes from the previous policy framework published by the Basel Committee and IOSCO in September 2013. The framework consists of key principles aimed to ensure harmonization across jurisdictions. The requirements apply to financial firms and systemically important non-financial entities (“covered entities”), the definitions for which are left to national regulation. The Basel Committee and IOSCO have no power to impose any mandatory requirements on regulatory authorities, but rather serve as a reference for national regulators as they adopt their respective margin regimes. The main revisions pertain to the phase in period for posting and collecting initial margin which has been delayed from December 1, 2015 to September 1, 2016. Additionally, the phase-in period for required variation margin, originally set to begin on December 1, 2015, will now begin on September 1, 2016 for covered entities belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeds €3 trillion and March 1, 2017 for all other covered entities. There has currently been no formal statement from US or EU regulatory authorities regarding delay to implementation.

View the revised policy framework

View the summary of key revisions to the September 2013 policy framework

The US Commodity Futures Trading Commission approved a final rule amending CFTC Regulation 1.22 by removing December 31, 2018 as the automatic termination date of the phased-in compliance period for the Residual Interest Deadline for Futures Commission Merchants. Regulation 1.22 concerns the posting of collateral. In the event that a customer’s account has insufficient margin, an FCM must commit its own capital—often referred to as “residual interest” — to make up the difference. Previously, the Residual Interest Deadline was set at 6pm Eastern Standard Time and would automatically occur, without any CFTC action or opportunity for public input. In November 2014, the CFTC proposed to amend the rule so that the Residual Interest Deadline would not occur earlier than 6pm without an affirmative CFTC action and an opportunity for public comment. The current action by the CFTC is to finalize this change.

View the Final Rule

The US Commodity Futures Trading Commission requested public comment on the US District Court of DC’s remand order in Securities Industry and Financial Markets Association, et al. v. CFTC (“Cross-Border Litigation”). The CFTC release expands on its consideration of costs and benefits of 10 swaps rules regarding the treatment of overseas swaps subject to the order and requests comment on the application of the costs and benefits of the rules in the context of extraterritoriality. In Cross-Border Litigation, three trade associations challenged the CFTC’s 2013 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations and requested the court to release 14 swap regulations in terms of overseas applications issued in July 2013. On September 16, 2014, the court granted summary judgment in favor of the CFTC and denied the plaintiffs relief; however it required the CFTC to supplement the 10 swaps regulations with a detailed analysis of associated costs and benefits. Comments are due by May 11, 2015.

View the CFTC press release

View the CFTC request for comment

The European Securities and Markets Authority published a revised opinion on its draft RTS on the clearing obligation for interest rate swaps. ESMA has revised its original opinion to take account of the notification it received from the European Commission that the Commission intended to adopt the draft RTS with amendments. The opinion annexes revised RTS which clarify certain points and propose further revisions to the Commission’s amendments, including that: (i) for a period of three years, financial counterparties will be able to apply for the intragroup transaction exemption for their transactions with any third-country entity in the absence of decisions on equivalence; and (ii) the €8 billion clearing obligation threshold applies at individual fund level when the counterparties are UCITS or alternative investment funds.

View the ESMA’s opinion

The International Swaps and Derivatives Association published a set of principles for improving regulatory transparency of the global derivatives markets through standardizing, aggregating and sharing data. The principles are: (i) regulatory reporting requirements for derivatives transactions should be harmonized within and across borders; (ii) policy makers should adopt the use of standards to aid improved quality and consistency of compliance with reporting requirements; (iii) market participants and regulators should collaborate to improve consistency in the absence of global standards; (iv) laws and regulations preventing access by authorities to data across borders should be amended or repealed; and (v) reporting progress should be benchmarked to provide incentives to progress reporting.

View the ISDA principles

The European Securities and Markets Authority published an addendum consultation paper complementing the transparency section of its previous consultation paper published in December 2014 on the implementation of the Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation. The addendum seeks views on transparency requirements for non-equity instruments not covered in the previously published consultation paper, namely foreign exchange derivatives, credit derivatives, other derivatives and contracts for difference. The draft regulatory technical standards on transparency requirements of bonds, structured finance  products, emission allowances and derivatives previously referred to in the December 2014 consultation are completed in this addendum, and therefore the addendum should be read alongside the previously published consultation. MiFID II and MiFIR are applicable from January 3, 2017. The consultation closes on March 20, 2015.

View the consultation paper.

The European Securities and Markets Authority published its annual report on its supervision of credit rating agencies and trade repositories. In the report, ESMA sets out its work plan for trade repositories for 2015. Trade repositories are authorized and supervised by ESMA under EMIR. ESMA’s 2015 work plan focuses on: (i) monitoring the action and improvement plans of trade repositories, including the data quality action plan; (ii) monitoring system operation and changes deployment; (iii) thematic reviews relating to the inter-TR reconciliation process, business continuity planning and cost relatedness of fees; (iv) trade repository’s systems software development lifecycle; (v) data availability; (vi) regulators’ access to trade repositories; and (vii) confidentiality of trade repository data.

View ESMA's report.

The Securities and Exchange Commission published final rules regarding security-based swap data repository registration and security-based swap reporting in accordance with Section 763 and Section 766 of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules establish (i) a registration process for swap data repositories; and (ii) certain policies and procedures for the reporting and dissemination of security-based swap transactions by registered swap data repositories. The goal of the regulation is to improve transparency in security-based swap reporting and is a part of the overall regulatory agenda to improve transparency in the OTC dervatives markets.

Additionally, the SEC issued two security-based swap proposed rules regarding the physical reporting and public availability of security-based swap data. The SEC also proposed new rules, rule amendments and guidance to Regulation SBSR regarding the reporting duties for cleared and platform-executed security-based swap transactions.

View the final rule on the SEC site.

View the SEC Open Meeting notice.