The European Securities and Markets Authority has adopted two Decisions on the provision of Contracts for Difference and binary options to retail investors. The effect of the Decisions is to prohibit the marketing, distribution and sale of binary options to retail investors and to impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.

Read more.

The European Securities and Markets Authority has published a Final Report, setting out Guidelines for national regulators of CCPs on the application of rules under the European Market Infrastructure Regulation that require CCPs to adopt anti-procyclicality margin measures.

EMIR requires CCPs to impose, call and collect margins to limit their credit exposures from clearing members. A CCP must also regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions taking into account any potentially procyclical effects of those revisions. Procyclicality of margin is the term used to describe the fact that margin requirements for the same portfolio are higher in times of market stress and lower in calm conditions. Regulatory Technical Standards under EMIR set out requirements for CCPs to use at least one of three options to limit procyclicality to the extent that the financial soundness of the CCP is not negatively affected. This has been controversial, since U.S. regulators impose no such requirements in practice on U.S. CCPs, leading to more expensive margin requirements in Europe. The Guidelines seek to clarify and ensure consistent application of the requirements across the EU.

Read more.

A Commission Delegated Regulation has been published in the Official Journal of the European Union, setting out Regulatory Technical Standards on procedures for excluding from the own funds requirement for credit valuation adjustment risk transactions with non-financial counterparties that are established in a third country and that do not hold positions over the clearing threshold under the European Market Infrastructure Regulation (so called NFC-s). The RTS supplement the requirements of the Capital Requirements Regulation.

Under the CRR, transactions between an institution and a NFC- are excluded from the own funds requirements for CVA risk, irrespective of whether that NFC- is established in the EU or in a third country. As NFC-s established in third countries are not subject directly to EU regulation, the RTS clarify that EU firms are responsible for: (i) taking the necessary steps to identify all NFC-s under this exemption and calculating accordingly their own funds requirements for CVA risk; (ii) ensuring that exempt counterparties established outside the EU would qualify as NFC-s if they were established in the EU; and (iii) ensuring that counterparties calculate the clearing threshold according to the relevant provisions in EMIR and do not exceed those thresholds.

Read more.

The Joint Committee of the European Supervisory Authorities has published two consultations on proposed amendments to: (i) Regulatory Technical Standards on the clearing obligation under the European Market Infrastructure Regulation for certain classes of OTC derivatives; and (ii) RTS on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP. The proposed changes aim to incorporate the provisions of the Securitization Regulation (also known as the STS Regulation), which entered into force on January 17, 2018.

The Securitization Regulation notes that there is a degree of substitutability between covered bonds and securitizations. The Securitization Regulation therefore amends EMIR, among other things, to ensure consistency of treatment between the regime for derivatives transactions associated with covered bonds and the one for securitizations, with respect to the clearing obligation and the margin requirements for non-centrally cleared OTC derivatives. The ESAs have been mandated to make the necessary changes to existing RTS to effect consistent treatment.

Read more.

U.S. Treasury Counselor to the Secretary, Craig Phillips, spoke at the International Swaps and Derivatives Association’s 33rd annual general meeting regarding regulatory policies of relevance to ISDA members.

Read more.

The Chair of the European Securities and Markets Authority, Steven Maijoor, has written to the European Commission recommending that clarification of certain provisions of the European Market Infrastructure Regulation should be made during the current revision of EMIR. EMIR requires clearing members of CCPs to provide initial margin and default fund contributions. ESMA has noticed that CCPs across the EU, as well as their national regulators, are adopting different approaches to these requirements for public entities. Some CCPs and national regulators exempt public entity clearing members from the requirement to provide initial margin and default fund contributions while others grant no exemptions.

ESMA requests the Commission to consider whether the scope of EMIR needs to be clarified and whether a specific amendment could be made to EMIR during the current review process.

The European Commission published legislative proposals to amend EMIR in May - the technical revisions in so-called EMIR 2.1 - and June 2017 - the Brexit-driven CCP "location policy" or so-called EMIR 2.2, which attempts to force the relocation of UK CCPs to the Eurozone. The legislative procedures to finalize those changes are ongoing.

View the letter.

View the Commission's technical amendments legislative proposal.

View the Commission's location policy legislative proposal.

The Financial Stability Board has opened a second consultation on governance of the Unique Product Identifier. The FSB identified UPIs in September 2014 as a critical element towards a mechanism to produce and share global aggregated derivatives reporting data, along with the development of a unique transaction identifier and the harmonization of other key data elements. The receipt of aggregated derivatives reporting data will enable national regulators to better assess systemic risk and perform other market oversight functions.

The purpose of the UPI is to uniquely identify OTC derivatives products that regulators require, or may require in the future, to be reported to trade repositories. The UPI system will assign a code to each OTC derivative product which maps to a set of data elements describing the product in a corresponding reference database, the UPI Reference Data Library. The Library will be administered by either one or a number of UPI Service Provider(s).

This second consultation paper seeks feedback on specific issues relating to the UPI Governance Arrangements, including fee models and cost recovery, intellectual property, standardization and potential restrictions on the activities of a UPI service provider. The FSB is also asking for feedback on whether a single UPI service provider model would be more suitable than having a competitive multi-UPI service provider model.

The consultation closes on May 24, 2018. The FSB intends to finalize the UPI governance arrangements and identify one or more UPI service provider(s) by mid-2019.

View the consultation paper.

The European Securities and Markets Authority has published a letter from its Chair, Steven Maijoor, to the European Commission seeking clarification on how to interpret the ancillary activity exemption under the revised Markets in Financial Instruments Directive.

MiFID II exempts non-financial entities that deal on own account, or provide investment services to clients, in commodity derivatives from having to obtain authorization as an investment firm under MiFID II provided that, among other things, this activity is ancillary to their main business. The provisions of MiFID II are supplemented by a Commission Delegated Regulation setting out the Regulatory Technical Standard on the criteria to establish when an activity is considered to be ancillary to the main business. The wording of both MiFID II and the RTS suggest that the tests for whether activity is ancillary should be carried out at the level of the entity's group. However, some drafting amendments that were introduced by the Commission have led to uncertainty as to whether the tests should be carried out at the level of the entity rather than at group level.

ESMA states that it would not be appropriate for it to address this uncertainty through its usual Questions and Answers and invites the Commission to provide further guidance on the interpretation and implementation of the ancillary activity criteria, in particular on the level at which the tests should be applied.

View the ESMA letter.

View the Commission Delegated Regulation (2017/592).

The Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions have published final Technical Guidance on the harmonization of critical OTC derivatives data reported to trade repositories. The Technical Guidance does not cover the Unique Transaction Identifier and Unique Product Identifier. The Financial Stability Board identified the development of a UTI, UPI and other key data elements as critical for a mechanism to produce and share global aggregated derivatives reporting data. The Technical Guidance sets out the definition, format and allowable values of critical elements that would facilitate consistent aggregation of reported data at global level. It does not specify which data elements must be reported because those requirements are set by the relevant authorities in each jurisdiction. The Guidance is for national authorities to use and it is not intended to function as a set of rules for market participants.

View the Technical Guidance.

The Financial Conduct Authority has published a statement confirming the regulatory requirements applicable to firms engaged in cryptocurrency derivatives. The FCA does not regulate cryptocurrencies, provided that they do not form part of other regulated services or products. However, the FCA states that cryptocurrency derivatives may be categorized as financial instruments under the revised Markets in Financial Instruments Directive II and that firms carrying out regulated activities in cryptocurrency derivatives should comply with the FCA's Handbook rules as well as the directly applicable EU provisions. The FCA points out that dealing in, arranging transactions in, advising on or providing other services that are regulated activities in relation to derivatives that reference cryptocurrencies or tokens issued through an Initial Coin Offering will require FCA authorization.

View the FCA's statement.

The European Securities and Markets Authority has confirmed that it will use its product intervention powers under the Markets in Financial Instruments Regulation to prohibit the marketing, distribution and sale of binary options to retail investors. It will also impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.

Read more.

The European Securities and Markets Authority has published finalized Guidelines on position calculation by trade repositories under the European Market Infrastructure Regulation. ESMA consulted on a draft version of the Guidelines at the end of 2017. 

EMIR requires that derivatives contracts are reported to a trade repository by the parties to the contract or by the CCP. Reporting parties do not have to report their trades to the same trade repositories. Instead, trade repositories must take steps to reconcile records among one another.  Trade repositories are required to calculate the positions by class of derivatives and the reporting entity, based on the reports received. Trade repositories are also required to publish aggregate positions by class of derivatives.

ESMA has introduced new Guidelines to provide a framework for trade repositories to provide the relevant calculations in a common format and follow a consistent methodology and timeline. This will promote the provision to relevant authorities with more consistent and harmonized position data in relation to derivatives and higher standards as regards the data that is made available to authorities.

Read more

The Financial Stability Board has launched a survey seeking feedback from financial institutions and other reporting entities on legal barriers that prevent or hinder them from reporting full transaction information on over-the-counter derivatives trades to Trade Repositories.

Legal barriers that can prevent full trade reporting include blocking laws, client confidentiality laws, data protection laws and related requirements or restrictions. Trade reporting is an important component of the comprehensive reforms of OTC derivatives markets agreed by the G20 in 2009.  A thematic peer review of derivative trade reporting conducted by the FSB in 2015 revealed a number of legal barriers to trade reporting. These barriers can hamper national regulators in carrying out their regulatory obligations, such as monitoring and analyzing systemic risk and market activity. The FSB has previously published progress reports in 2016 and 2017 setting out steps FSB member jurisdictions have taken and are planning to take. FSB member jurisdictions have committed to take action to remove legal barriers by June 2018.

Read more.

The European Securities and Markets Authority has published an Opinion on the treatment of package orders in the context of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation requires that the trading of certain derivatives must take place on a regulated market, multilateral trading facility, organised trading facility or on an equivalent third-country trading venue.

Package orders are used by investment firms and their clients to conduct trades for risk management and hedging purposes. They are composed of two or more financial instruments that are priced as a single unit. The execution of each component is simultaneous and contingent upon on the execution of all the other components. Under MiFIR, the trading obligation is designed to apply at instrument level, not package level – the obligation attaches to the components of a package, but not to the package as a whole. Difficulties may arise where a package order contains a mixture of instruments, where some are subject to the trading obligation while others are not. ESMA considers that the components of a package need to be executed on a trading venue only where it is feasible to do so without creating undue operational or execution risk.

Read more.

The Federal Reserve Bank of New York has announced it will begin publication of three Treasury repo reference rates on April 3, 2018. The rates will reflect data from the previous day and will be published each day at approximately 8:00 a.m. Eastern Time.

These rates include the Secured Overnight Financing Rate (SOFR), which will be based on triparty repo data from Bank of New York Mellon and cleared bilateral and GCF Repo data from the Depository Trust & Clearing Corporation; the Triparty General Collateral Rate (TGCR), which will solely include triparty repo data; and the Broad General Collateral Rate (BGCR), which will be based on triparty repo data and GCF Repo data. In December, the Alternative Reference Rates Committee recommended SOFR as an alternative to U.S. dollar LIBOR in certain new U.S. dollar derivatives and other financial contracts.

Read more.

The Commodity Futures Trading Commission Chief of Staff Michael Gill provided an update on the CFTC's Project KISS initiative at the CFTC KISS Policy Forum in Washington, D.C. He said that after a thorough review of public comments received through the initiative, the Commission has broken the recommendations down into three tiers: (1) simple housekeeping changes with no discretionary policy adjustments; (2) suggestions reducing regulatory burdens with minor policy implications; and (3) initiatives that have more significant policy implications. Through the Project KISS review process, the CFTC is only focused on the first two tiers, although suggestions in the third tier will be addressed at a later date, Gill said.

The proposals cover a wide range of policy issues across the CFTC's divisions. The Division of Clearing and Risk is examining the process through which the CFTC grants exemptions from derivatives clearing organization registration, amendments to various DCO regulations and extensive proposed amendments to current Part 190 regulations.

Read more. 

The US Commodity Futures Trading Commission is considering a new measure to calculate the size of the interest rate swap (IRS) markets. Under the methodology proposed in a paper by CFTC Chief Economist Bruce Tuckman, the value of the IRS markets would be determined by the calculation of what the paper refers to as "Entity-Netted Notionals" (ENNs) instead of the current gross notional measure used today, which the paper argues overstates risk transfer in the markets.

ENNs would be calculated by: (1) converting the long and short notional amounts of each counterparty to five-year risk equivalents; (2) netting longs against shorts in a given currency within pairs of legal entities; and (3) summing the resulting net longs or shorts across counterparties. Under this calculation, the value of the current IRS markets would be approximately $15 trillion, which represents roughly 8% of the current $179 trillion market valuation under the current notional calculation.

In a speech introducing the paper, CFTC Chairman J. Christopher Giancarlo argued that the new measure would ensure the IRS markets are more easily compared to other markets, and, in particular, that it would bring their value closer to other fixed income markets, such as the markets for US Treasuries, corporate bonds, mortgages and municipal securities. However, he also acknowledged that ENNs are not intended to measure counterparty or operational risk and said his intention is not necessarily to use the calculation to rethink regulatory thresholds, such as the swap dealer de minimis registration threshold.

The CFTC is looking for market reaction to the ENNs proposal.

View the Office of the Chief Economist's paper.

View Chairman Giancarlo's speech.

The European Securities and Markets Authority is consulting on proposed guidelines for national regulators of CCPs on the application of the rules requiring CCPs to adopt anti-procyclicality margin measures.

The European Market Infrastructure Regulation requires CCPs to impose, call and collect margins to limit its credit exposures from clearing members. A CCP must also regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions taking into account any potentially procyclical effects of those revisions. The Regulatory Technical Standards on requirements for CCPs provides that CCPs must use at least one of three options to limit procyclicality to the extent that the financial soundness of the CCP is not negatively affected.

During the EMIR Review, ESMA highlighted that the implementation of these requirements differs across CCPs and that the effectiveness and supervision of these measures could be improved. The draft guidelines seek to clarify and ensure consistent application of the requirements across the EU.

Read more.

The Commodity Futures Trading Commission has released a backgrounder on the federal oversight of virtual currencies and its approach to regulating the virtual currency derivatives markets. Because virtual currencies have been deemed a commodity, certain derivative and other transactions in virtual currencies may be subject to CFTC oversight under the Commodity Exchange Act.

The CFTC outlined its 5-pronged approach to the regulation of derivatives involving virtual currencies, which will focus on (1) consumer education; (2) asserting legal authority; (3) market intelligence; (4) robust enforcement; and (5) government-wide coordination.

Read more. 

The Financial Stability Board has published the Governance Arrangements for the Unique Transaction Identifier and a recommended implementation plan for the arrangements following its consultation in March 2017. The UTI is a critical element for the production and sharing of global aggregated derivatives reporting data. The purpose of the global UTI would be to uniquely identify each OTC derivative transaction required by authorities to be reported to trade repositories, thus minimizing the potential for the same transaction to be counted more than once.

The FSB has designated the International Organization for Standardization as the body responsible for publishing and maintaining the UTI data standard. The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have been designated on an interim basis as responsible for the governance functions relating to the UTI. The FSB would like the UTI to have a common governance framework and governance body with the unique product identifier and will make the final permanent designation once the governance of the UPI is finalized. The FSB intends to consult further on the UPI governance arrangements in 2018.

The FSB recommends that the UTI is implemented by no later than the end of 2020.

View the FSB's governance arrangements for the UTI.

A Commission Delegated Regulation on the derivatives trading obligation under the Markets in Financial Instruments Regulation has been published in the Official Journal of the European Union.

The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation applies to financial counterparties and to non-financial counterparties. Where a class of derivatives is determined to be subject to the MiFIR trading obligation, such derivative may only be traded on a third country trading venues if it has been determined to be equivalent by the European Commission.

Read more. 

The Joint Committee of the European Supervisory Authorities has published a final report containing final draft Regulatory Technical Standards amending the requirements for risk-mitigation techniques for uncleared OTC derivative contracts where those contracts relate to physically settled FX forwards. The European Market Infrastructure Regulation requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The RTS prescribe required margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as listing securities eligible as collateral, such as sovereign bonds, covered bonds, some securitization instruments, corporate bonds, gold and some equities. The variation margin requirements have applied to all counterparties since March 1, 2017 although they will only be applicable for physically-settled FX forwards from January 3, 2018.

Market participants have experienced difficulties in exchanging VM, in particular, in transactions with end-users. In addition, the EU's implementation of the international standards on margin exchange is more extensive than that in some other jurisdictions.

Read more.

The European Securities and Markets Authority has published two revised Opinions providing further guidance on the post-trade transparency and position limits requirements relating to transactions on non-EU trading venues under the revised Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation. ESMA first published the Opinions in May 2017.

The first Opinion sets out ESMA's view on determining third-country trading venues for the purpose of transparency under MiFIR. MiFIR requires EU investment firms to make information on transactions in financial instruments traded on a trading venue public. Details of actual transactions must be made public as close to real time as possible – for equities, within one minute of trading, and for non-equities, within 15 minutes (reducing to five minutes in 2020). The Opinion sets out ESMA's view of which transactions between EU and non-EU firms, and which transactions conducted on third-country trading venues should be subject to these post-trade transparency requirements. The Opinion provides objective criteria for identifying those third-country venues that have similar post-trade transparency requirements as EU trading venues. Trades on third-county venues that satisfy the criteria will not need to be made transparent post-trade.

Read more.

The Financial Stability Board, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures and the International Organization for Securities Commissions have jointly launched a review of the regulatory reforms on incentives for central clearing of OTC derivatives. The review forms part of the FSB’s commitment to evaluate the effects of the G20 Financial Regulatory reforms. Qualitative survey forms have been published for participants in the clearing space (CCPs, clients/end-users, clearing members and banks providing clearing services to clients) to complete on a group-wide basis.

The deadline for submitting completed surveys is January 26, 2018. A final report on the impact of the G20 reforms is expected by the end of 2018.

View the surveys and related information.

The European Commission has published a Communication on further steps towards completing Europe's Economic and Monetary Union. The Commission is proposing several initiatives. First, the Commission is proposing a regulation to establish a European Monetary Fund. The EMF would replace the existing European Stability Mechanism and would act as a backstop to the Single Resolution Fund. Any support that the EMF provided to the SRF would need to be fully repaid by the Single Resolution Board from its own resources, including contributions from the industry. There are also proposals on new budgetary instruments for a stable euro area within the EU framework, changes to the Common Provisions Regulation, proposals to strengthen the Structural Reform Support Programme and a proposal to establish a European Minister of Economy and Finance. The Communication is supplemented by a proposed roadmap for implementing these steps over the next 18 months. The proposed roadmap indicates the dates by which certain of the Commission's proposed financial services legislation would be finalized. The risk-reduction package (amendments to the Capital Requirements framework and the Bank Recovery and Resolution Directive) would be finalized by mid-2018 and the Capital Markets Union legislative initiatives, including the review of the European Supervisory Authorities and the European Market Infrastructure Regulation, would be finalized by mid-2019.

View the Commission's Communication.

The European Commission has adopted a Commission Implementing Decision on the equivalence of the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the United States for the purposes of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. From January 3, 2018 MiFIR will require that derivatives declared subject to the trading obligation must be traded on EU trading venues or third-country trading venues recognized by the European Commission as equivalent. Derivatives that will be subject to the trading obligation are euro, dollar and pound interest rate swaps in the most common benchmark tenors, as well as index-based credit default swaps.

Read more.

The Joint Committee of the European Supervisory Authorities has announced a review of the Regulatory Technical Standards under the European Market Infrastructure Regulation which include the requirement to exchange variation margin for physically-settled FX forwards.

EMIR requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The RTS prescribe required margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as listing securities eligible as collateral, such as sovereign bonds, covered bonds, some securitization instruments, corporate bonds, gold and some equities. The variation margin requirements have applied to all counterparties since March 1, 2017 although they will only be applicable for physically-settled FX forwards from January 3, 2018.

Market participants have experienced difficulties in exchanging VM, in particular, in transactions with end-users. In addition, the EU's implementation of the international standards on margin exchange is more extensive than that in some other jurisdictions.

Read more. 

The final Regulatory Technical Standards under the Markets in Financial Instruments Regulation on indirect clearing arrangements for exchange-traded derivatives and amending RTS under the European Market Infrastructure Regulation on indirect clearing arrangements for OTC derivatives have been published in the Official Journal of the European Union. The versions published are equal to those which were adopted by the European Commission on September 22, 2017. Indirect clearing refers to a situation where two or more entities are intermediaries standing between a client and a CCP in a contractual chain. EMIR established RTS on indirect clearing arrangements applicable to OTC products and MiFID extends these rules and principles to exchange-traded products. The EMIR RTS is now being revised to align with the new MiFIR RTS. Both pieces of legislation allow for indirect clearing arrangements to be established, and establish structures intended to result in equivalent protections for indirect clearing to those available for direct clearing (where only one intermediary exists). Various requirements in relation to segregation and portability at client, clearing member and CCP level are established and new required procedures to manage client defaults apply at clearing member level. Two new kinds of accounts must be established at client, clearing member and CCP level which enable such persons to distinguish indirect client positions and collateral from own account client positions and collateral.

The RTS and the amending RTS will enter into force on December 11, 2017 and will apply from January 3, 2018.

View the RTS on indirect clearing under MiFIR.

View the amending RTS on indirect clearing under EMIR.

View the existing RTS on indirect clearing under EMIR.

The Commodity Futures Trading Commission Division of Market Oversight has issued no-action relief to Swap Execution Facilities and their chief compliance officers from certain timing requirements regarding annual compliance reports and fourth quarter financial reports.  SEF CCOs are required to file the compliance report with the CFTC no later than 60 calendar days after the end of the SEF’s fiscal year, and a SEF must concurrently file its fourth quarter financial report with the CFTC within that same time frame.  Multiple SEFs have cited difficulty complying with CFTC time constraints.  The relief provides SEFs and their CCOs an additional 30 calendar days to concurrently file the compliance report and fourth quarter financial report with the CFTC, such that the reports will now be due no later than 90 calendar days after the end of the SEF’s fiscal year.

The relief, issued under CFTC staff letter 17-61, is set to expire November 30, 2020.

View the Press Release.

View CFTC Staff Letter 17-61.

The European Securities and Markets Authority has published proposed Guidelines on position calculation by trade repositories under the European Market Infrastructure Regulation. EMIR requires that derivatives contracts are reported to a trade repository by the parties to the contract or the CCP. Reporting parties do not have to report their trades to the same trade repositories. Instead, trade repositories must take steps to reconcile records among one another.  Repositories are required to calculate the positions by class of derivatives and the reporting entity, based on the reports received. Trade repositories are also required to publish aggregate positions by class of derivatives. ESMA is proposing new Guidelines for trade repositories on calculating the positions because trade repositories have adopted different and inconsistent approaches to position calculation which thwarts the aggregation of data across trade repositories for the purpose of monitoring systemic risks to financial stability. The proposed Guidelines seek to ensure consistency between trade repository position calculations so that overall entity-level positions can be determined by the supervising authorities. The proposed Guidelines include high-level principles and specific procedures for trade repositories to follow and require trade repositories to make available position data in four separate reports – a Position Set, Currency Position Set, Collateral Set and Collateral Currency Position Set.

ESMA is requesting feedback on the proposed Guidelines by January 15, 2018. ESMA expects to publish a final report and final Guidelines in the first half of 2018.

View the proposed Guidelines.

The Commodity Futures Trading Commission Chairman J. Christopher Giancarlo has authored an opinion piece in the Wall Street Journal warning of potential consequences if the European Union mishandles Britain's impending exit from the EU. The European Commission's proposed amendments to the European Market Infrastructure Regulation and the regulation establishing the European Securities and Markets Authority would provide ESMA and the European Central Bank with greater supervisory powers over third-country CCPs. Specifically, Chairman Giancarlo argued that the European Commission’s proposed rulemaking that would authorize regulation of financial entities outside the EU by the European Central Bank and ESMA would result in overlapping and uncoordinated regulation in US financial markets. Chairman Giancarlo believes this lack of harmonization and clear jurisdictional limitations could prove expensive and damaging to US economic growth and ultimately impact job growth. Additionally, Chairman Giancarlo suggests that submitting to European rules could set a dangerous precedent going forward which could result in further imposition of European costs and regulatory burdens on the US economy.

View the article. 

A Commission Implementing Decision declaring equivalence of the US legal, supervisory and enforcement arrangements for risk mitigation techniques and exchange of collateral has been published in the Official Journal of the European Union. The European Market Infrastructure Regulation requires counterparties to uncleared derivatives to comply with requirements on timely confirmation, portfolio compression, procedures for reconciliation of disputes and the exchange of collateral, collectively known as the risk mitigation techniques. The European Commission is empowered to adopt an equivalence decision declaring that the requirements of a third country are equivalent to the EMIR requirements on risk mitigation.

The Implementing Decision applies to swaps regulated by the Commodity Futures Trading Commission that are not cleared by a CCP where at least one of the counterparties to the swap is established in the US and is registered with the CFTC as a swap dealer or a major swap participant, and for collateral exchange, where the US counterparty is subject to CFTC margin requirements. This Decision means that where an EU counterparty that is subject to the requirements of EMIR enters into an uncleared derivatives contract with a US swap dealer or major swap participant, the EU counterparty will be deemed to have complied with its obligations under EMIR by complying with the US requirements.

This is the first equivalence decision under EMIR relating to the risk mitigation techniques for uncleared derivatives. Equivalence decisions relating to the supervision and regulation of CCPs are already in place. The Implementing Decision enters into force on November 3, 2017.

View the Implementing Decision.

The European Commission and the US Commodity Futures Trading Commission have published a joint statement announcing a common approach for recognizing certain derivatives trading venues authorized in the EU and the US for the purposes of the trading obligation. The Markets in Financial Instruments Regulation imposes a trading obligation on EU financial counterparties and non-financial counterparties for transactions in derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation; (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility or organized trading facility) or a third-country equivalent trading venue; and (iii) are sufficiently liquid. The European Commission may adopt an equivalence decision declaring that certain third-country trading venues are subject to an equivalent legal, supervisory and enforcement regime to the EU requirements under MiFID II and the Market Abuse Regulation. The common approach signifies that it is intended that the European Commission will adopt an equivalence decision for swap execution facilities and designated contract markets regulated by the CFTC. Similarly, the CFTC will exempt MTFs and OTFs from the requirement to register as SEFs.

Read more. 

A Commission Delegated Regulation amending the Regulatory Technical Standards on data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing the data was published in the Official Journal of the European Union. The amending Delegated Regulation revises the original RTS by further specifying the operational standards that trade repositories must have in place to aggregate data so that data can be compared across trade repositories and regulators can have direct and immediate access to the data.

The amending Delegated Regulation enters into force on October 27, 2017, and will apply from November 1, 2017.

View the Amending Delegated Regulation.

The Financial Stability Board has published a press release summarizing the outcome of its plenary meeting in Berlin on October 6, 2017, at which it considered potential vulnerabilities in the financial system and discussed a number of areas from its workplan.

Read more.

The Financial Stability Board has launched a consultation on governance arrangements for the unique product identifier. The development of a UPI was identified in September 2014 by the FSB as a critical element for a mechanism to produce and share global aggregated derivatives reporting data, along with the development of a unique transaction identifier and the harmonization of other key data elements. The receipt of aggregated derivatives reporting data will enable national regulators to better assess systemic risk and perform other market oversight functions. In the UPI system envisaged, a unique UPI Code would be assigned to each distinct OTC derivative product and map to a set of reference data elements having specific values that together describe the product. The collection of reference data elements and their values for each product would reside in a corresponding UPI Reference Data Library that would be administered by either one UPI Service Provider or one of a number of UPI Service Providers.

The consultation paper outlines the potential governance functions that the FSB anticipates should be performed (such as ongoing UPI generation and oversight of the UPI System) and key criteria the FSB has preliminarily identified to assess UPI governance arrangements. The consultation also sets out considerations for using one or many UPI Service Providers.

Comments on the consultation are invited by November 17, 2017.

Read more.

The European Securities and Markets Authority has published a final Report and final draft Regulatory Technical Standards on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation will apply to financial counterparties and to non-financial counterparties. Where ESMA determines that a class of derivatives should be subject to the MiFIR trading obligation, third country trading venues would only be permissible for trading by EU entities when determined to be equivalent by the European Commission.

The final draft RTS on the trading obligation provide for the trading obligation to apply to fixed-to-float interest rate swaps denominated in euros, US dollars and pound sterling and to index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover). The trading obligation for both IRS and CDS will apply from January 3, 2018, unless the clearing obligation for a particular class of derivatives has not yet entered into force.

Read more.

The International Swaps and Derivatives Association has published a paper outlining recommendations for a CCP Recovery and Resolution Framework.
 

The ISDA's paper focuses on CCPs that clear derivatives, although many of its recommendations will be relevant to clearing houses that clear other instruments. It is intended to build on the guidance from CPMI-IOSCO and the FSB. The paper sets out certain key points for CCPs, their supervisors, resolution authorities and other policy makers to consider when implementing CCP recovery and resolution mechanisms.
 

In brief, the ISDA's recommendations cover: (i) the level of transparency that should be afforded to clearing participants about the expected recovery and resolution strategies for a CCP, so that participants can manage and control their potential exposure; (ii) the timing of the resolution regime and the necessary flexibility that should be incorporated into the regime to allow for further recovery measures; (iii) the allocation of losses after a clearing member default, including by making cash calls and the application of variation margin gains haircutting (initial margin haircutting is not supported by the paper however); (iv) tools to rebalance a CCP's book, including the use of partial tear-ups as a last resort, but excluding forced allocation of positions to non-defaulting clearing members; (v) claims for clearing participants that suffer losses beyond a certain point in CCP recovery or resolution; (vi) the allocation of non-default losses; and (vii) ensuring adequate liquidity from central banks on standard market terms.
 

View the Paper.

The European Securities and Markets Authority has published final Guidelines governing the transfer of data between trade repositories (TRs) registered or recognised by ESMA.

The Guidelines cover: (i) the reporting without duplication of derivative contract data by counterparties and CCPs; (ii) transfer of derivatives data between trade repositories at the request of the counterparties to a derivative, or the entity reporting on their behalf; (iii) transfer of data from a TR whose registration has been withdrawn; and (iv) the requirements on TRs to promptly record information received and maintain information for at least ten years following termination of the relevant contracts.

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The U.S. Commodity Futures Trading Commission’s (CFTC) Divisions of Swap Dealer and Intermediary Oversight (DSIO), Clearing and Risk, and Market Oversight issued a time-limited no-action letter providing relief to certain CFTC-registered swap dealers (SDs) that operate outside of the United States (Non-U.S. SDs) from specific transaction-level requirements pursuant to the Commodity Exchange Act.

The letter sets forth certain limitations and the relief is subject to the effective date of CFTC action determining which transaction-level requirements are applicable to certain swaps between non-U.S. SDs and their U.S. counterparts. This relief comes as a result of compliance issues raised by a DSIO-issued advisory on November 14, 2013 regarding applicability of the CFTC’s transaction-level requirements in certain circumstances.

View CFTC Staff Letter 17-36.

The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (Division) announced the launch of an in-depth review of the swap data reporting regulations found in Parts 43, 45, and 49 of the CFTC’s regulations. In addition, the Division has opened a 40-day comment period to receive input on this effort from all entities involved in reporting swaps, which must be received by August 21, 2017.

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U.S. Commodity Futures Trading Commission Acting Chairman J. Christopher Giancarlo appointed Daniel Gorfine to serve as Director of LabCFTC and Chief Innovation Officer, effective immediately. Gorfine will be responsible for coordinating with international regulatory bodies, other US regulators, and Congress to determine best practices in implementing digital and agile regulatory frameworks for the CFTC.

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The European Securities and Markets Authority has published proposed amendments to its Regulatory Technical Standards under the European Markets Infrastructure Regulation, following a public consultation between December 2016 and February 2017. ESMA provided final draft RTS to the European Commission in 2012 specifying the frequency and the details of the information to be made available by Trade Repositories to the relevant authorities and the information to be published by TRs. The RTS also specified the operational standards required to aggregate and compare data across TRs and for the relevant authorities to have access to information as necessary.

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The U.S. Commodity Futures Trading Commission issued an Order of Registration to LedgerX LLC (LedgerX) granting their request to register as a Swap Execution Facility (SEF). As a result, LedgerX becomes the 25^th SEF registered with the CFTC.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorized the creation of SEFs, which are under the CFTC’s jurisdiction and function as platforms for the trading of swaps.

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The European Commission has published legislative proposals to amend the European Market Infrastructure Regulation and the Regulation establishing the European Securities and Markets Authority. The proposals are on the supervision of CCPs, both EU CCPs and third country CCPs, and include the controversial new proposals for a formal EU "location policy" for CCPs.

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A Commission Delegated Regulation exempting central banks in six countries - Australia, Canada, Hong Kong, Mexico, Singapore and Switzerland - from complying with the European Market Infrastructure Regulation was published in the Official Journal of the European Union. EMIR imposes clearing, reporting and risk mitigation obligations for derivatives. EU central banks and EU public bodies managing public debt are exempt from EMIR. The European Commission may exempt central banks and public bodies managing public debt from other countries following analysis of the international treatment of the relevant entities in a particular country. Central banks and public bodies responsible for the management of debt in the United States and Japan were the first to be added to the list of exempted bodies through a Commission Delegated Regulation. These new exemptions will come into effect on June 30, 2017.

View the Delegated Regulation.

The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) issued a no-action letter extending the relief provided in CFTC Staff Letter No. 16-58, which was set to expire on June 15, 2017. CFTC Staff Letter No. 16-58 extended relief form several CFTC regulations to allow swap execution facilities (SEFs) and designated contract markets (DCMs) to fix clerical or operational errors that resulted in a swaps failing to clear, and thus becoming void, and smilar errors discovered after a swap has been cleared.

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The U.S. Commodity Futures Trading Commission (CFTC) unanimously approved a series of amendments to the CFTC’s Whistleblower Rules with the goal of strengthening anti-retaliation protections for whistleblowers and improving the review process for whistleblower claims.

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Acting Chairman of the US Commodity Futures Trading Commission, Christopher Giancarlo, gave a speech at the International Swaps and Derivatives Association 32nd Annual Meeting in Lisbon calling for regulators in both the U.S. and abroad to “recalibrate bank capital requirements to better balance systemic risk concerns with healthy economic growth."  In the speech, Acting Chairman Giancarlo stated that global swap market reforms have failed to adequately address whether the amount of bank capital that has been taken out of trading markets because of bank capital requirements has been calibrated to the amount of capital needed in the global markets to "support overall market health and durability”. In addition, Acting Chairman Giancarlo spoke in support of moving the CFTC to a more flexible, outcomes-based approach for cross-border equivalence and substituted compliance.

View text of the speech.

The European Commission has published a legislative proposal to amend the European Market Infrastructure Regulation. This proposal is the result of an extensive assessment of EMIR between 2015 and 2016. The proposal covers a wide-range of areas within EMIR, including reporting requirements, non-financial counterparties, exemptions and trade repositories.

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