The CFTC issued Orders of Registration (Orders) to the following Foreign Boards of Trade (FBOT): (i) Eurex Deutschland; (ii) CME Europe Limited; (iii) ICE Futures Europe; (iv) The London Metal Exchange; and (v) London Stock Exchange plc. Under the Orders, each of the FBOTs is permitted to provide identified members or other participants located in the US with direct access to its electronic order entry and trade matching system.

The CFTC issued the Orders under part 48 of the CFTC’s regulations, which provides that such Orders may be issued to an FBOT that possesses, among other things, the attributes of an established, organized exchange and is subject to continued oversight by a regulator that provides comprehensive supervision and regulation that is comparable to the supervision and regulation exercised by the CFTC.

Upon review of their applications, the CFTC determined that these FBOTs have demonstrated their ability to comply with the requirements of CFTC regulations, including CFTC regulation 48.8, which outlines the conditions of registration. This regulation also permits any additional conditions that the CFTC deems necessary and may impose after appropriate notice and opportunity to respond. Each FBOT shall also continue to fulfill each of the representations it made in support of its applications for registration.

View CFTC press release.
 

The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published a joint consultative report on the harmonization of a second batch of key OTC derivatives data elements. The report is in response to the 2009 G20 agreement that all OTC derivatives contracts would be reported to trade repositories - part of the G20’s overall commitment to reforming the OTC derivatives markets to improve transparency, mitigate systemic risk and prevent market abuse. This consultation complements the consultation on Harmonization of key OTC derivatives data elements (other than UTI and UPI), published in September 2015 and other reports on the Harmonization of the Unique Product Identifier. The purpose of this consultation is to develop guidance for regulators on definitions for the second batch of critical data elements that are important for global consistency and the meaningful aggregation of trade repository OTC derivatives transactions data. The consultation seeks views on matters including: (i) proposed definitions of key data elements; (ii) whether the proposed definitions cover different market practices globally; (iii) whether any alternative approaches to those mentioned in the report would better achieve the stated objectives; and (iv) whether the consultative guidance is unambiguous. A consultation on the third batch of key data elements is expected in 2017. Responses to the proposals are due by November 30, 2016.

View the consultation paper.

View the consultative report on the first batch of OTC derivatives data elements. 

The US Commodity Futures Trading Commission Division of Market Oversight (DMO) extended time-limited no-action relief to swap execution facilities from certain requirements in the definition of “block trade” in CFTC regulations. Specifically, CFTC regulation section 43.2 defines a “block trade” as, among other things, a publicly reportable swap transaction that “[o]ccurs away from the registered [SEF’s] or [DCM’s] trading system or platform and is executed pursuant to the registered [SEF’s] or [DCM’s] rules and procedures.”

Subject to certain conditions, the no-action letter extends time-limited relief to SEFs from the “occurs away” requirement under section 43.2 until November 15, 2017 before 11:59 p.m., Eastern Standard Time, or the effective date of any CFTC action with respect to the issues discussed in this no-action letter. Among other things, the extension will allow the DMO to continue to evaluate best practices and a more permanent solution to the issues involved in screening block trade orders for compliance with risk-based limits including, if appropriate, amendments to CFTC regulations.

Parties to a swap who do not use the SEF functionalities this letter provides must ensure the required pre-execution credit check occurs.

View CFTC staff letter.

The CFTC announced that CFTC Chairman Timothy Massad and Andrew Bailey, Chief Executive of the FCA, signed a Memorandum of Understanding (MOU) regarding cooperation and the exchange of information in the supervision and oversight of certain regulated firms that operate on a cross-border basis in the United States and in the United Kingdom.

Through the MOU, the CFTC and FCA express their willingness to cooperate in the interest of fulfilling their regulatory mandates. The scope of the MOU includes the 20 firms registered with the CFTC as swap dealers.

View MOU.

The European Commission adopted Regulatory Technical Standards on risk mitigation techniques for uncleared OTC derivatives. The European Market Infrastructure Regulation requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. These RTS prescribe the regulatory margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated as well as outlining a broad list of securities eligible as collateral for the exchange of margins, such as sovereign securities, covered bonds, specific securitizations, corporate bonds, gold and equities.

The Joint Committee of the European Supervisory Authorities submitted final draft RTS to the Commission on March 8, 2016. The Joint Committee is made up of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. On July 28, 2016, the European Commission requested the ESAs to amend the final draft RTS and submit a modified version for approval. The ESAs rejected many of the proposed amendments in an Opinion published on September 8, 2016, including certain amendments relating to concentration limits on initial margin for pensions scheme arrangements, the proposed amendments to the calculation of the threshold against non-netting jurisdictions, amendments relating to the treatment of covered bonds and the treatment of bilateral derivative contracts where a counterparty is a CCP, transactions with third country counterparties and the process for regulators on the exemption of intragroup derivative contracts.

Read more.

The European Securities and Markets Authority published a Final Report and final Guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under the Market Abuse Regulation. This follows the consultation that ESMA undertook in March 2016. MAR replaced the current Market Abuse Directive and its implementing legislation from July 3, 2016. One of the changes that MAR will introduce is the expansion of the definition of inside information relating to commodity derivatives to cover price sensitive information relevant to the related spot commodity contracts as well as the derivative. This means that transactions in commodity derivatives based on inside information relating to underlying spot transactions will be expressly prohibited. In addition, the market manipulation prohibitions will include transactions in derivatives markets that manipulate the related spot commodity transaction and transactions in spot commodity markets that manipulate the related derivative. 

Read more.

The US Securities and Exchange Commission voted to establish enhanced standards for the operation and governance of securities clearing agencies that are deemed systemically important by the Financial Stability Oversight Council or that are involved in complex transactions, such as security-based swaps. Covered securities clearing agencies are required to adopt specific enhancements related to financial risk management, governance, recovery planning, operations and disclosure to market participants. The rules, if adopted, will come into effect 60 days after the final rule is published in the Federal Register, and covered security clearing agencies would be required to comply with the rule’s requirements within 120 days thereafter.

The SEC also voted to propose to apply the enhanced standards to other categories of securities clearing agencies, including all SEC-registered clearing agencies that are central counterparties, central securities depositories or securities settlement systems. Comments are due on the proposed amendments within 60 days of publication of the release in the Federal Register.

View proposed rule.

The CFTC expanded the existing clearing requirement to interest rate swaps through an amendment to regulation 50.4(a), requiring that market participants submit a covered swap for clearing by a derivatives clearing organization. The amendment expanded four interest rate swap classes to require clearing by a DCO: (i) fixed-to-floating interest rate swaps denominated by the Australian dollar, Canadian dollar, Hong Kong dollar, Mexican peso, Norwegian krone, Polish zloty, Singapore dollar, Swedish krona and Swiss franc; (ii) basis swaps denominated in Australian dollars; (iii) forward rate agreements denominated in Norwegian krone, Polish zloty and Swedish krona; and (iv) overnight index swaps (OIS) denominated in Australian and Canadian dollars, as well as US dollar-, euro- and sterling-denominated OIS with termination dates up to three years. Unlike the proposed rulemaking, AUD-denominated forward rate agreements were not included in the final rule. Compliance with the final rule will be phased in over a two-year period according to an implementation schedule based on when analogous clearing requirements will take effect in other jurisdictions.

View final rule.

View Q&A document.

Timothy Massad, Chairman of the CFTC, spoke at the SIFMA annual meeting about clearinghouse regulation, technological changes and finishing Dodd-Frank rulemaking. Massad first highlighted ongoing CFTC work regarding stress testing across multiple clearinghouses to study systemic issues and interdependencies, recovery plans for systemically important clearinghouses and CFTC’s involvement in international coordination of clearinghouse recovery and resolution.

He next focused on two technological issues, cyberattack risk and automated trading. He highlighted CFTC rules about cyberdefense testing for market infrastructure firms. He also discussed efforts the CFTC took to address challenges posed by automated trading including working to finalize Regulation AT, which is designed to address the risk of disruption posed by automatic trading.

Chairman Massad discussed CFTC’s work finalizing rules required by Dodd-Frank Act, including margin rules on uncleared swaps effective on September 1, 2016. He noted that the CFTC is considering lowering the de minimis threshold (when an entity’s swap dealing activities require the entity to register with the CFTC) for swap dealing (from $8 billion to $3 billion). He also noted that the CFTC intends to repropose rules on capital requirements for swap dealers and major swap participants and that he expects the CFTC to issue a rule on certain aspects of cross-border application of swaps rules this fall.

View Chairman Massad's remarks.

The US Federal Reserve Board issued a notice of proposed rulemaking to tighten capital and other regulatory requirements on financial holding companies that participate in physical commodity trading activities, to remove copper from the list of metals that bank holding companies are permitted to own and store as an activity closely related to banking and to rescind previous orders authorizing certain FHCs to engage in energy management services and tolling activities. A FRB staff memo on the proposed rule published on the same day identified fourteen FHCs that presently have the authority to engage in various physical commodity activities. As justification for the proposed rule, the FRB stated that legal risks associated with physical commodities activities can, at times, exceed the committed capital and insurance policies of the FHC, and that risk, with other legal and reputational risks, can pose a threat to safety and soundness of an FHC engaged in physical commodity activities.

In addition, the Federal Reserve Board proposed to rescind specific authorization to the five FHCs authorized to participate in energy tolling and energy management services. The FRB is reconsidering whether those activities are complementary to financial activities as is physical commodity trading. The Federal Reserve indicated that these activities do not support and are not directly related to otherwise permissible commodities derivatives activities or other financial activities. Comments on the proposed rule must be submitted by December 22, 2016.

View proposed rule.

View staff memo.

The Center for Capital Markets Competitiveness of the US Chamber of Commerce wrote a letter to Scott Alvarez, General Counsel of the Federal Reserve Board, requesting that the Federal Reserve Board withdraw its report, issued pursuant to Section 620 of the Dodd-Frank Act, advocating for a repeal of merchant banking authority for financial holding companies.

The letter noted that there was no opportunity for stakeholders to comment on the proposed removal of merchant banking authority, and alleged that the Federal Reserve Board, by presenting the contents of the letter as a policy recommendation to Congress, “short-circuited” the notice-and-comment procedure. The Center also alleged that the Federal Reserve Board failed to identify the benefits of repealing merchant banking authority in the report, unjustly presenting a one-sided case for its recommendations to Congress.

The Center also took issue with the substance of the proposal, arguing that repealing merchant banking authority would deny companies access to capital at a time when credit is already difficult to access, particularly in light of what the Center characterized as “hypothetical” risks in comparison to the “real” benefits of merchant banking. The letter concludes by recommending that the Federal Reserve Board withdraw its report and hold a series of public meetings to develop a “more robust” recommendation on merchant banking policy.

View letter.

As part of his keynote remarks at the 4th Annual OTC Derivatives Summit North America, US Commodity Futures Trading Commission Chairman Timothy Massad addressed the CFTC’s achievements in the past year and more specifically, the implementation of global rules setting margin for uncleared swaps and the de minimis threshold for swap dealers.

With respect to the rules on margin for uncleared swaps, Massad stressed the importance of harmonizing the substance of the rules with other regulators, including US domestic prudential regulators and international jurisdictions, as well as addressing the cross-border implications of transactions.  Massad pointed to the broad scope of substituted compliance with the rules of other jurisdictions as well as agreed timetables for implementation with international regulators. Massad maintained that despite his disappointment following the European Commission’s announcement of a delay in the implementation of their rules, it was appropriate to maintain the September 1, 2016 initial compliance date for transactions between the largest swap dealers.

Regarding the swap dealer de minimis threshold, Massad stated he will recommend a one-year delay in the scheduled reduction of the de minimis threshold for swap dealer registration in order for the CFTC to have more time to consider the issue.  The current de minimis threshold of $8 billion is scheduled to decrease to $3 billion in December 2017.  Massad also said that he has asked the other CFTC members to consider a reproposed rule setting capital requirements for swap dealers, noting that “[i]t makes sense to finalize this before turning to the threshold" and adding that he hopes it will be done “shortly.”

Chairman Massad Full Remarks.

The U.S. Commodity Futures Trading Commission approved a final rule instituting system safeguards testing requirements for designated contract markets, swap execution facilities, swap data repositories and derivatives clearing organizations. In addition, the CFTC also issued a comparability determination for certain of Japan’s margin requirements for uncleared swaps. The CFTC’s determination would permit substituted compliance with Japan’s uncleared swap margin rules in place of the uncleared swap margin provisions of Title VII of the Dodd-Frank Act.

View full text of CFTC final rule on system safeguards testing requirements.

View full text CFTC comparability determination.

The Joint Committee of the European Supervisory Authorities published an Opinion on the European Commission's proposed amendments to the final draft Regulatory Technical Standards on risk mitigation techniques for uncleared OTC derivatives under the European Markets Infrastructure Regulation. The Joint Committee is made up of the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority. The Opinion includes a revised version of the final draft RTS.

Read more.

The US CFTC requested public comment on proposed amendments to the Whistleblower Rules found in Part 165 of the CFTC’s regulations. The amendments would improve the process for reviewing whistleblower claims and clarify staff authority to administer the whistleblower program. The proposal would also strengthen the CFTC’s authority to protect whistleblowers from retaliation through CFTC enforcement action under the Commodity Exchange Act.

The amendments would also make changes to eligibility requirements, the award claims process (and review of that process), whistleblower identifying information and the treatment of employer confidentiality provisions. Comments to the proposed amendments were due on September 29, 2016.

View proposed Whistleblower Rule Amendments.

The US CFTC extended the comment period to September 20, 2016, on its proposed amendments to Regulation 4.22 with respect to the annual report that each commodity pool operator registered or required to be registered with the CFTC must distribute for each commodity pool that it operates.

View proposed amendments.

The Financial Stability Board published its eleventh progress report on the implementation of reforms by standard-setting bodies, national and regional authorities and market participants to the over-the-counter derivatives market as agreed by the G20. Such reforms include the trade reporting of OTC derivatives, central clearing of standardized OTC derivatives and higher capital and minimum margin requirements for non-centrally cleared derivatives. The FSB concluded that the progress of implementing reforms is continuing, but that regulators have noted challenges to implementation.

Read more.

The Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions published a second report on proposed guidance for a harmonized Unique Product Identifier. 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. Currently, OTC derivative trades can be reported to one of the six trade repositories currently authorized in the EU. However, in order to properly mitigate systemic risk and protect against market abuse, it is necessary for data across trade repositories to be aggregated and for reporting fields to be harmonized so that national regulators have a comprehensive view of the OTC derivatives markets and trading activity. The first consultation focused on the reference database (or classification system). The focus of this second consultation is on the possible form, content and granularity of reference data assigned to each OTC derivative product.
 
Comments on the proposals are due by September 30, 2016, with publication of final guidance expected around the end of 2016.

View the second consultative report.

View the first consultative report.

The Financial Stability Board published a progress report on its CCP workplan. The progress report provides an update on implementation of a workplan agreed on by the FSB, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions (the Group) in April 2015. The workplan focuses on the resilience, recovery planning and resolvability of CCPs and coordinating the roles of each organization in achieving a new international framework for CCPs.

Read more.

The CFTC issued a final report on the de minimis exception from the definition of a “swap dealer” under CFTC Regulation 1.3(ggg). The exception currently applies to a person whose swap dealing activities are less than an aggregate gross notional amount of $8 billion over the prior 12-month period. Unless the CFTC takes action, the $8 billion threshold will be reduced on December 31, 2017 to $3 billion. While CFTC staff did not ultimately issue a recommendation, they noted the advantages and disadvantages of implementing, delaying or changing the $3 billion threshold, creating different threshold for various asset classes or creating a multi-factor test for determining the de minimis exception.

CFTC Commissioner J. Christopher Giancarlo issued a statement upon release of the report expressing disappointment that the staff did not recommend eliminating or delaying the transition to a $3 billion threshold. He noted that market participants now have to prepare for the implementation of the lower threshold and at the same time urged the Commission to keep the registration threshold at $8 billion.

View CFTC Report.

View Commissioner Giancarlo's statement.

The CFTC issued proposed amendments to CFTC Regulation 3.3 concerning chief compliance officers of futures commission merchants, swap dealers and major swap participants. The proposed amendments would codify existing no-action relief (CFTC Staff Letter 15-15) regarding when such registrants must furnish their CCO annual report to the CFTC, clarify filing requirements for registrants located in a jurisdiction for which the CFTC has issued a comparability determination and delegate to the Director of the Division of Swap Dealer and Intermediary Oversight authority to grant extensions to the CCO annual report filing deadline. Comments on the proposed amendments were due by September 12, 2016.

View Proposed Amendments.

View CFTC Staff Letter.

The CFTC approved an exemption for Federal Reserve Banks that maintain customer accounts for certain derivatives clearing organizations from liability under the Commodity Exchange Act. The exemption allows the Federal Reserve Banks to hold customer funds of DCOs designated by the FSOC as systemically important without being subject to liability under the CEA and also exempts the Federal Reserve Banks from private rights of action that could otherwise be brought under the CEA.

View CFTC Press Release which includes Links to Exemption.

The CFTC’s Division of Clearing and Risk issued an interpretative letter where CFTC staff stated that it would be inconsistent with CFTC regulations for a DCO to accept or hold initial margin in the form of, or to invest funds belonging to the DCO, its clearing members or clearing members’ customers in, certain prime and government money market funds that have authority to suspend redemptions. However, government MMFs that do not adopt such redemption restrictions would remain acceptable for margin collateral and investments.

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued a related no-action letter. Although an FCM will generally not be permitted to invest segregated customer funds (including an FCM’s own funds held in a segregated account) in such prime and government MMFs, the letter allows such investments if they are limited to the amount of funds the FCM holds in excess of the firm’s targeted residual interest. The letter also addresses the treatment of permitted MMF investments by an FCM under Rule 1.25.

View CFTC Press Release including links to interpretative and no-action letters.

The CFTC issued a Final Response to the United States District Court for the District of Columbia Remand Order in Securities Industry and Financial Markets Association, et al. v. United States Commodity Futures Trading Commission, which was a challenge by industry groups to the CFTC’s guidance as to the application of certain requirements to cross-border swaps transactions. In a decision issued on September 16, 2014, the District Court denied the plaintiffs’ demand that the CFTC be enjoined from enforcing extraterritorially Title VII of the Dodd-Frank Act and related regulations, and upheld the CFTC’s 2013 cross-border guidance. The District Court did direct the CFTC to further explain and consider the costs and benefits of certain rules.

Read more.
 

Te US Federal Reserve Board, FDIC, OCC, Federal Housing Finance Agency and Farm Credit Administration announced a final rule exempting from the agencies’ margin requirements certain non-cleared swaps with commercial end users, small banks, savings associations, Farm Credit System institutions and credit unions with $10 billion or less in total assets. Certain non-cleared swaps with certain treasury affiliates, certain financial cooperatives and captive finance companies also are exempted. In all cases, the non-cleared swaps must hedge or mitigate commercial risk of these counterparties and satisfy the applicable requirements for an exemption from mandatory clearing.

The exemptions were first adopted by interim final rule published in the Federal Register in November 2015. The final rule adopts the earlier interim final rule as final without change. The agencies established initial and variation margin requirements for non-cleared swaps, as required by the Dodd-Frank Act, in a separate rulemaking published in November 2015.

View Final Rule.

The European Commission published regulatory technical standards on margin for uncleared swaps and a letter to the European Supervisory Authorities notifying them of the Commission's intention to endorse (with amendments) the draft RTS submitted by the ESAs in March 2016. 

The CFTC announced the signing of counterparts with certain Canadian authorities to a Memorandum of Understanding (MOU), originally executed on March 25, 2014, regarding cooperation and the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in the United States and in Canada. The scope of the MOU includes markets and organized trading platforms, central counterparties, trade repositories and intermediaries, dealers and other market participants.

View CFTC press release and counterparts to MOU.

the CFTC announced that it is seeking comment on proposed amendments to CFTC Regulation 3.10(c) to modify an exemption from registration for certain foreign persons in connection with commodity interest transactions solely on behalf of persons located outside the US, or on behalf of certain international financial institutions. The amendments would codify certain existing no-action relief. Comments were due by September 6, 2016.

View CFTC proposal.

The OFR published a working paper that examines whether new rules imposed on bilateral trading incentivize central clearing of derivatives. By comparing the total capital and collateral costs when banks transact bilaterally to the capital and collateral costs when they clear through CCPs, the study finds that central clearing is sometimes more expensive. While “the cost comparison does not necessarily favor central clearing, . . . when it does, the incentive may be driven by questionable differences in CCPs’ default waterfall resources.” In the absence of a cost advantage for central clearing, market participants may be motivated to customize contracts in order to trade them bilaterally. The authors find that without a cost advantage, banks may also be less inclined to move legacy trades to CCPs.

View OFR working paper.

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued a staff advisory regarding chief compliance officer reporting line requirements for swap dealers, major swap participants and futures commission merchants under CFTC Regulation 3.3. The advisory clarifies the regulation’s required elements and addresses additional supervisory relationships that a chief compliance officer may have with senior management in addition to those with the board or the senior officer of the registrant.

View CFTC staff advisory.

The European Securities and Markets Authority published a list of US designated contract markets considered equivalent to a regulated market in the European Union. The list is based on a Commission Implementing Decision published in the Official Journal of the European Union on July 2, 2016, which considered that 15 DCMs located in the United States are equivalent. The DCMs have been deemed equivalent for purposes of the definition of over-the-counter derivatives in the European Markets and Infrastructure Regulation. This means that derivative contracts traded on these DCMs would not be deemed to be OTC derivatives and therefore not be subject an obligation to clear the transactions, report on them and undertake risk mitigation steps as if they were OTC, under EMIR. To be deemed equivalent, a third country market must comply with legally binding requirements in its home state equivalent to the Markets in Financial Instruments Directive and must also be subject to effective supervision and enforcement in that third country on an on-going basis. 

View the Commission Implementing Decision.  

View ESMA’s library on post trading. 

A Commission Delegated Regulation supplementing the European Market Infrastructure Regulation with regard to Regulatory Technical Standards on the clearing obligation was published in the Official Journal of the European Union. The RTS relates to classes of over the counter (OTC) derivatives that are to be subject to the clearing obligation, and specifies that the following classes will be subject to the clearing obligation under the European Markets Infrastructure Regulation: (a) fixed-to-float interest rate swap classes denominated in NOK, PLN and SEK; and (b) forward rate agreement classes denominated in NOK, PLN and SEK will be subject to the clearing obligation under EMIR. These classes will not include contracts concluded with covered bond issuers or with cover pools for covered bonds, provided that they meet certain conditions set out in the RTS. 

The CFTC issued an Order extending the designation of DTCC-SWIFT as the provider of legal entity identifiers for entities under its jurisdiction, including swaps and swap counterparties, by another year. The CFTC initially designated DTCC-SWIFT as LEI provider by an Order on July 23, 2012. The CFTC has previously extended such designation. Consistent with the prior CFTC orders, registered entities and swap counterparties subject to the CFTC’s jurisdiction can continue to comply with the CFTC’s swap data recordkeeping and reporting rules by using LEIs issued by DTCC-SWIFT.

View CFTC Order.

The European Securities and Markets Authority launched a consultation on proposals to delay the application of the clearing obligation for financial counterparties and alternative investment funds with a limited volume of derivatives activity. 

The European Market Infrastructure Regulation imposes a clearing obligation on certain classes of derivatives. ESMA has so far assessed that the clearing obligation should apply to interest rate swaps denominated in seven currencies (EUR, GBP, JPY, USD NOK, PLN and SEK) and to two classes of credit default swaps indices: iTraxx Europe Main and iTraxx Europe Crossover. The obligation to clear OTC IRS denominated in the G4 currencies (EUR, GBP, JPY and USD) applied to entities that are clearing members of EU CCPs from June 21, 2016. 
 

The CFTC Division of Swap Dealer and Intermediary Oversight issued a staff advisory to remind futures commission merchants and introducing brokers of their compliance obligations to report suspicious activities to the Financial Crimes Enforcement Network. In addition, the staff advisory reminds all CFTC registrants of their compliance obligations regarding economic sanctions programs against countries and groups of individuals administered by the Office of Foreign Assets Control. The staff advisory provides a brief outline of the requirements of suspicious activity reporting and the requirements of OFAC.

View CFTC staff advisory.

The European Securities and Markets Authority published an Opinion, dated June 23, 2016, on a Denmark-based pension scheme that is to be exempted from the clearing obligation under the European Market Infrastructure Regulation. The Opinion was requested by Finanstilsynet (the Danish financial supervisory authority) and relates to life insurer personal schemes. ESMA published a positive opinion for three other types of Danish pension schemes in April this year: life insurer occupational schemes, labor market related life insurer and multi employer pension fund. Transitional exemptions from the clearing obligation under EMIR can be granted to pension scheme arrangements that meet certain criteria, essentially, when OTC derivatives contracts are entered into and are used for hedging purposes. To obtain an exemption, requests must be made by the pension scheme to a national regulator. Under EMIR, the national regulator must then seek an Opinion from ESMA before making a final exemption decision. This follows the extension of the transitional exemption period from the clearing obligation for pension funds to August 16, 2017 which is the revised date by which pension funds must comply with the EU clearing obligation under EMIR.

View ESMA's Opinion.

US Senator Elizabeth Warren (D-Mass), along with US Senator Mark Warner (D-Va), introduced a new derivatives regulation bill. The Derivatives Oversight and Taxpayer Protection Act proposes to strengthen federal oversight of the derivatives market and ensure that big financial firms, instead of taxpayers, will be held responsible for derivative losses.

If enacted, Senator Warren’s bill would greatly expand the regulatory capacities and powers of the CFTC. It proposes to provide the CFTC with a stable funding stream and allows the agency to impose penalties large enough to impact the bottom lines of even the largest financial firms. The bill also proposes to place certain cross-border and foreign exchange swaps under CFTC jurisdiction, changes how derivatives are treated in bankruptcy, requires posting of initial margin for inter-affiliate swaps, limits the use of netting in calculating risk-based capital and leverage limits relating to derivatives transactions and requires regulators to review derivatives clearinghouses.

View text of the bill.

The CFTC approved a final rule that amends existing swap reporting regulations to provide additional clarity to swap counterparties and registered entities regarding their reporting obligations for cleared swap transactions and to improve the efficiency of data collection and maintenance associated with the reporting of the swaps involved in cleared swap transactions.

The final rule removes uncertainty as to which counterparty to a swap is responsible for reporting creation and continuation data for each of the various components of a cleared swap transaction. For example, it clarifies whose obligation it is to report the extinguishment of a swap upon its acceptance by a derivatives clearing organization for clearing. The CFTC anticipates that the rule will have a number of other benefits, including a reduced likelihood of double counting notional exposures and an improved ability to trace the history of a cleared swap transaction from execution between the original counterparties to clearing novation. The rule was published in the Federal Register on June 27, 2016, and will become effective 180 days from the date of publication.

View Final Rule.

The CFTC requested public comment on 34 submissions CFTC received in past several years from seven registered derivatives clearing organizations pursuant to section 2(h)(2)(B) of Commodity Exchange Act and CFTC regulation 39.5(b). Submissions cover certain interest rate swaps, credit default swaps, foreign exchange non-deliverable forwards, energy swaps, agricultural and inflation swaps. Public comments will inform CFTC as it considers whether to propose swap clearing requirement pursuant to section 2(h)(2)(D) of CEA.

In posting these submissions, CFTC is not proposing swap clearing requirement, as CFTC did most recently on June 9, 2016, regarding certain interest rate swaps. Submissions do not include swaps subject to this recent proposal or swaps currently required to be cleared under the CFTC’s existing clearing requirements. If CFTC decides to propose a clearing requirement determination for any of the swaps covered by the submissions posted on June 23, then, at that time, the CFTC will invite further public comment in response to a notice of proposed rulemaking, similar to the one published in the Federal Register on June 16, 2016 (81 Fed. Reg. 39506).

Comments may pertain specifically to a single submission or generally to several or all submissions. The CFTC is particularly interested in comments that provide data and analysis and discusses the swaps in terms of the five factors that CFTC is required to consider in determining whether to issue a clearing requirement determination under section 2(h)(2)(D) of the CEA. The comment period ended on July 25, 2016.

View CFTC press release.

The US FDIC approved a final rule developed jointly by the FDIC, the OCC, the Federal Reserve Board, the Farm Credit Administration and the Federal Housing Finance Agency that, pursuant to Title III of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), exempts certain non-cleared swaps and non-cleared security-based swaps with certain financial and non-financial end users from initial and variation margin requirements required pursuant to Sections 731 and 765 of the Dodd-Frank Act. Specifically, the final rule exempts from the margin requirements certain swaps with counterparties that are commercial end users, certain captive finance affiliates, treasury affiliates, cooperatives and small financial institutions. The final rule is effective October 1, 2016.

View FDIC final rule.

As part of her remarks at the Managed Funds Association Forum, CFTC Commissioner Sharon Bowen outlined various proposals to improve governance in CFTC-regulated entities.

Commissioner Bowen emphasized maintaining independent, high-caliber boards of directors. She suggested that the boards of CFTC-regulated entities “craft qualitative and quantitative standards for directors” to ensure individuals meet expected fitness standards, “create a strong company ethos” to improve the culture of compliance and limit the tenure of independent audit and compensation committee members to protect director independence.

Commissioner Bowen also proposed swap execution facility reform, calling for the centralized oversight of SEF surveillance and enforcement functions. She proposed that “all SEFs should be under one self-regulatory organization . . . whether that is the NFA or some other SRO,” so as to increase the efficiency of enforcement mechanisms, standardize rules and increase transparency.

Finally, with regards to swap intermediaries, Commissioner Bowen stated that “the CFTC should also require registration and testing of all swap intermediaries.” Registration would allow the CFTC to obtain more information about those entities intermediating trades in the market, and assess whether their actions are appropriate. Moreover, having robust testing standards for swap intermediaries would serve as a quality control check.

View Commissioner Bowen’s remarks.

The CFTC reopened the comment period for certain elements of its notice of the proposed rulemaking regarding Regulation Automated Trading (Regulation AT), initially proposed in December 2015.  The extension comes after a public roundtable meeting on June 10. Comments will be accepted from June 10, 2016 to June 24, 2016 on the topics that were discussed at the roundtable, including items on the discussion points paper released by the CFTC, the agenda for the roundtable discussion, as well as topics that arose during the roundtable.

View the press release.

The CFTC approved a final rule to amend existing swaps reporting regulations in order to provide additional clarity to swap counterparties and registered entities regarding their reporting obligations for cleared swap transactions. The final rule modifies Part 45 of the CFTC’s regulations, by removing uncertainty as to which counterparty to a swap is responsible for reporting data for each of the components of a cleared swap transaction, including to further clarify whose obligation it is to report the extinguishment of a swap once a derivatives clearing organization has accepted the transaction for clearing. The rule also improves the efficiency of data collection and maintenance associated with the reporting of the swaps involved in a cleared swap transaction. Specifically, the CFTC indicated that it expects that it will reduce the likelihood of double counting notional exposures and will improve the ability to trace the history of a cleared swap transaction from execution between the original counterparties to clearing novation. The rule will become effective 180 days after it is published in the Federal Register.  The rule also codifies previous CFTC no-action letters by eliminating the requirement for swap dealer/major swap participant reporting counterparties to report daily valuation data for cleared swaps effective immediately upon publication in the Federal Register.

View the final rule.

View Chairman Massad's statement.

The European Securities and Markets Authority published an updated list of recognized central counterparties based in third countries. Under the European Markets Infrastructure Regulation, third-country CCPs must be recognized by ESMA to operate and offer services in the European Union. The list has been updated to include the Chicago Mercantile Exchange Inc., established in the United States of America.  Inclusion of the CME brings the list of recognized CCPs to nineteen members from countries including Australia, Hong Kong, Japan and Singapore. Such jurisdictions have been deemed by the European Commission to have legal and supervisory provisions for CCPs equivalent to the regime for EU CCPs under EMIR.

View the list and ESMA's update.

The US Commodity Futures Trading Commission issued a no-action letter extending the relief provided in CFTC Letter No. 15-24, which expires on June 15, 2016. That no-action letter provides relief to swap execution facilities (SEFs) and designated contract markets (DCMs) to correct clerical or operational errors that caused a swap to be rejected for clearing and thus become void, as well as errors discovered after a swap has been cleared.

Specifically, if, within one hour after a trade has been rejected for clearing, the SEF or DCM corrects an error by permitting a new, pre-arranged trade with terms and conditions that match the terms and conditions of the original trade, other than any such error and time of execution, the trade will be permitted.  Moreover, if an error is discovered after a trade has been cleared, the SEF or DCM is permitted to enter into a pre-arranged trade between the original parties that offsets the swaps carried on the derivative clearing organization’s books. The SEF or DCM may also permit the original or intended counterparties to enter into a pre-arranged transaction that reflects the correct terms to which the parties agreed.

The no-action letter extends relief to the earlier of June 15, 2017 or the effective date of revised CFTC regulations that establish a permanent solution to addressing clerical or operational errors. 

View the press release.

The US Securities and Exchange Commission adopted a final rule requiring security-based swap dealers and major security-based swap participants to provide trade acknowledgments for security-based swap transactions.  The trade acknowledgment must contain all the terms of the transaction and be provided to the transaction counterparty no later than the end of the first business day after the transaction is executed, as well as promptly verify or dispute the terms of any trade acknowledgment it receives as a counterparty. Covered entities are also required to establish, maintain and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of all trade acknowledgments that they provide. The final rule provides exemptions for certain transactions that are processed through a registered clearing agency or executed on a security-based swap execution facility or national securities exchange. There is also an exemption from the requirements of Exchange Act Rule 10b-10 for broker dealers that satisfy the trade acknowledgment and verification requirements of the final rule. The final rule is effective 60 days after it is published in the Federal Register. 

View the final rule.

The US Commodity Futures Trading Commission announced the signing of a Memorandum of Understanding with the European Securities and Markets Authority regarding cooperation with respect to recognized central counterparties. Pursuant to the MOU, derivatives clearing organizations established in the United States may apply to ESMA for recognition as central counterparties, known as “Recognized CCPs.”
 
View the text of the MOU.

The CFTC issued for public comment a supplement to the CFTC’s December 2013 position limits proposal. The supplement would permit exchanges to recognize, subject to CFTC review, certain positions in commodity derivative contracts as non-enumerated bona fide hedges or enumerated anticipatory bona fide hedges, as well as to exempt from federal position limits certain spread positions. 

In a statement issued concurrently with the proposed rule, CFTC Chairman Timothy Massad noted that the proposed supplemental rule was a critical piece of the CFTC’s effort to finalize rules on position limits in 2016.

CFTC Commissioner Christopher Giancarlo also voiced support for the proposal in a separate statement, stating his belief that the proposal reflects practical realities by recognizing that most exchanges do not have access to sufficient swap position information to effectively monitor swap position limits. 
 
If adopted, the proposed supplement would relieve designated contract markets and swap execution facilities from setting and monitoring exchange limits on swaps until DCMs and SEFs have access to data that would enable them to do so. 

View the full text of the proposed supplemental rule. 

The US Commodity Futures Trading Commission issued a rule implementing a cross-border approach to the CFTC’s margin requirements for uncleared swaps. The CFTC’s margin rule applies to CFTC-registered swap dealers and major swap participants for which there is no prudential regulator (collectively, Covered Swap Entities or CSEs) but these rules are closely aligned with the cross-border margin requirements already adopted by the prudential regulators. 

Read more.

The Commodity Futures Trading Commission approved a final rule to amend a requirement found in CFTC Regulation 23.500(i) that swap dealers and major swap participants exchange the terms of swaps with their counterparties for portfolio reconciliation so that SDs and MSPs need only exchange the “material terms” of swaps. The final rule also amends the definition of “material terms” in CFTC Regulation 23.500(g). The final rule benefits SDs, MSPs, and their counterparties by allowing them to focus on reconciling data fields that impact swap valuation and counterparty obligations, without impairing the CFTC’s ability to oversee and regulate the swaps markets.

View the CFTC press release. 

View the final rule.