CFTC and European Commission Equivalence Decision

US Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo and European Commission (EC) Vice-President Valdis Dombrovskis announced a common approach for the mutual recognition of EU and US derivatives trading venues. The two regulatory bodies have made a joint announcement to ensure that both US and EU swap market counterparts are able to comply with trading obligations mandated by the EU and by the Commodity Exchange Act in their respective trading venues. The EC will adopt an equivalence decision in order to recognize non-EU regulatory frameworks such as CFTC’s Swap Execution Facilities (SEF) and designated contract markets (DCMs). This decision will alleviate the regulatory burden for US and EU companies. As per the European Commission press release,

The European Commission has today determined the United States to be equivalent to the European Market Infrastructure Regulation (EMIR) in terms of the legal, supervisory and enforcement arrangements for non-centrally cleared over-the-counter (OTC) derivatives transactions…It also determines that US rules on obligations on the exchange of collateral (‘margins’) between counterparties are equivalent to EU rules.

Thus, under this approach, both US and EU companies will be able to use any regulated swap trading platform in the US or EU to comply with their trading obligations. These Trading obligations were introduced by the G20 during the aftermath of the financial crisis, assuring transparent venues for trade of certain commonly used derivatives. The European commission lists the mutual benefits of non-EU regulatory framework recognition as:

  • [Allowing] authorities in the EU to rely on supervised entities’ compliance with equivalent rules in a non-EU country

  • [Reducing] or even [eliminating] overlaps in compliance requirements for both EU and foreign market players

  • [Making] certain services, products or activities of non-EU companies acceptable for regulatory purposes in the EU

  • [Allowing] less burdensome prudential regime to apply to EU banks and other financial institutions with exposures in equivalent non-EU countries.

It also determines that US rules on obligations on the exchange of collateral (‘margins’) between counterparties are equivalent to EU rules.

Margin Comparability by the CFTC

In addition to the EU’s equivalence decisions, the CFTC has made margin comparability determinations that will have a significant effect on corss-border swap activity. CFTC commissioners unanimously approved this week that EU entities registered as swap dealers will enjoy the substituted compliance provisions of CFTC margin rules. These margin rules have their boundaries:

  1. They apply only to uncleared swaps and not to bank swap dealers.
  2. They only apply to transactions that are both a swap and an OTC derivative.

The CFTC explains in their press release,

Pursuant to the CFTC’s comparability determination, a swap dealer or major swap participant that is subject to the both the CFTC’s and EU’s margin rules with respect to an uncleared swap may rely on substituted compliance wherever available under the CFTC’s margin rules. Any such swap dealer or major swap participant that complies with the EU’s margin rules would be deemed to be in compliance with the CFTC’s margin rules, but would remain subject to the CFTC’s examination and enforcement authority.

The CFTC’s comparability determination renders moot CFTC Staff Letter No. 17-22, in which the CFTC’s Division of Swap Dealer and Intermediary Oversight provided time-limited no-action relief from compliance with certain provisions of the CFTC’s margin rules for swap dealers that entered into swaps with counterparties that were subject to the EU’s margin rules.

This determination is effective immediately.

Chairman Giancarlo offered a positive outlook on the CFTC press release,

Today marks a significant milestone in cross-border harmonization between the European Commission and the CFTC. These cross-border measures will provide certainty to market participants and also ensure that our global markets are not stifled by fragmentation, inefficiencies, and higher costs. Indeed these measures are critical to maintaining the integrity of our swaps markets.

European Commission Equivalence Determinations

The EC financial regulation laws include provisions that allow it to adopt equivalence decisions through assessment of non-EU rules satisfying the same. The EU will verify that non-EU country rules have legally binding requirements, ensure effective supervision by authorities, and that they achieve the same results as the corresponding EU rules. A formal equivalence decision will then be adopted by the EC once all requirements are met. These equivalence decisions may take the form of an act which may outline whether equivalence is granted in full or partially, for how long, and whether it applies to the entire supervisory framework of a non-EU country or only to some of its authorities. The EU provides a list of equivalence decisions adopted in the area of baking and finance in their website.

These efforts will require close and dedicated efforts by both CFTC staff and EC staff. A joint press release stated such cooperative endeavors, “The CFTC staff and the EC services will work as expeditiously as practicable to ensure that this arrangement is put into place and operating in a coordinated manner, and will continuously monitor the impacts resulting from the implementation to assess whether any further action is appropriate.”

In a press release by the CFTC, Commissioner Brian Quintenz applauds the achievement between the two regulatory bodies, “I commend the staffs of the CFTC and EC for their hard work and dedication.” Chairman Giancarlo also provided statements on their cross-border collaboration, “I look forward to continuing to work with Vice President Dombrovskis and the European Commission staff in a cooperative manner to make further progress in harmonizing our regulatory frameworks.”

The next steps:

  • The CFTC staff will notify the EC of its list of eligible SEFs and DCMs while the EC will notify the CFTC of its list of eligible MiFID II/MiFIR and MAR compliant trading venues.
  • The CFTC staff and the staff of relevant national competent authorities under the coordination of the EC will also work towards concluding cooperation arrangements to ensure the effective exchange of information and coordination of supervisory activities.