Category: Swap Execution Facility

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.

Swaps Market Reform Has Little Effect on Trading Patterns

It’s been two weeks since the swaps market reform has forced banks and traders onto SEFs, and so far little has changed.

After making large scale changes to the swaps market in an attempt to increase transparency and competition within the market, it seems banks and other traders are still  mostly trading amongst themselves.

It was hoped that this swaps market reform would help promote trading between these two groups. But, even without this, the market will at least be more transparent.

Before swaps were regulated, it was very difficult to see just how interconnected banks were, as most trades were handled over the phone. It’s thought that this helped exacerbate the 2008 financial crisis. With trades having to be done over SEFs, they can now be recorded and monitored.

On another note, it seems that the push to SEFs hasn’t had much of an effect on liquidity either. While the market did see a 30-40% drop in total trade volume during the first week, it is already back to average levels, according to Bloomberg.

The CFTC granted a three month delay to package swaps, which some think may be part of the reason  for the rather anticlimactic results.

Currently, SEF members aren’t commenting on the matter, feeling as though two weeks is too soon to begin making assessments of the market.

CFTC and EU Work Out Cross-Border Trading Agreement

The Commodity Futures Trading Commission (CFTC) and the European Union (EU) have been butting heads over how to jointly regulate international swap trades for some time now. But after meeting yesterday, it seems the two regulators have finally worked out a cross-border trading agreement.

The CFTC and the EU have agreed to allow US firms to trade over European platforms, rather than forcing them to be traded through US swap execution facilities, or SEFs. The cross-border trading agreement will keep liquidity within the market, as well as ease tensions between the US and Europe over the CFTC’s foreign trading policy.

The agreement is not without restrictions however. In order for trades to be executed outside of US facilities, the country handling the trade must have standards in place that can be considered comparable to the CFTC’s. While this may seem simple enough, the requirement has so far only been met by the UK, according to the commission.

It also may be some time before other European countries are considered up to par by the Commission, as the EU isn’t planning to have its trading rules in place until 2016.

This new cross-border trading agreement is quite the turnaround for the CFTC— which was actually sued for its overbearing foreign trading policies toward the end of last year. This is no doubt due in part to former chairman Gary Gensler stepping down, and it will be interesting to see how the market fares with a more lenient CFTC.

CFTC Commissioner O’Malia pleased with SEF performance, but sees room for improvement

According to the Wall Street Journal, Commodity Futures Trading Commission’s Scott O’Malia seems content with how the swap execution facilities have been operating since they were instituted.

As a means to make the derivative market more transparent due to its role in the financial crisis of 2008, the CFTC had mandated that all trading must be done through what they called swap execution facilities, or SEFs. October 2nd was the deadline for all trades to transition over to these new facilities.

Since opening, the SEFs have been involved in around $462 billion dollars in interest rate swaps and about $26 billion dollars in credit derivatives. Of this trading, close to half of it has been done electronically, with the other half being traded over the phone or by other means.

O’Malia, who was named commissioner of the CFTC in 2009, has stated that there have not been any significant issues to date, though they were having difficulty getting consistent data on just how many trades have been executed through the facilities so far.

O’Malia did seem concerned about the structure of the U.S. swap market, fearing that it may begin to resemble the fragmented nature of the U.S. stock market. He also hopes to see credit checks being built into the platforms to guard against traders putting themselves in overly risky positions, though he is aware that this will take time.

Swaps Trade Transitioning Smoothly, Despite Government Shut Down

With the exception of a few delays instituted within the past week, the deadline put in place by the Commodity Futures Trading Commission for swaps traders to comply with new regulations has come, and the transition is well underway. As of today, almost all swaps trades are being handled through Swap Execution Facilities, or SEFs. And, according to The Financial Times, some SEFs have already begun announcing their first transactions ahead of schedule, with Javelin Capital Markets having opened its doors to pair buyers with sellers on Tuesday, a full day before the deadline.

The CFTC mandated that all swaps trading must be done through SEFs in order to add more transparency to the swaps market, which is often considered to be a major factor in the cause of the 2008 financial crisis.

While all swaps trades will have to go through SEFs eventually, the CFTC recently granted a one month delay to foreign exchange swaps and a two month delay in equity swaps, after members of the industry complained that they needed more time.

Interestingly, while the transition to a more streamlined and transparent market place is going rather smoothly, operations within the CFTC will be quite hectic, thanks to the government shutdown that began on Tuesday.  According to the Wall Street Journal, the CFTC is currently running with a mere 28 of its over 600 employees. However, while many of its normal practices will undoubtedly be put on hold, the CFTC will still be monitoring the market place for any suspicious trading.

CFTC allows for a few delays in swap trade initiatives

According to Reuters, the Commodity Futures Trading Commission (CFTC), who has by and large refused to budge on its October 2nd deadline for SEF’s to implement its new rules, will allow for a delay in a few of its initiatives.

In an effort to increase transparency and minimize the risk associated with the swap trade market, often blamed as one of the leading factors of the 2008 financial crisis, the CFTC has been working quickly to create Swap Execution Facilities, platforms where all swap trading will be handled and monitored. Before the CFTC, much of the swap trade market was handled over the phone—a $630 trillion dollar market going almost completely unchecked. While negotiation will still be allowed over the phone, all trading must be entered into systems, creating a much simpler, and readily accessible, set of records.

The delays will affect the required reporting of foreign exchange swaps as well as equity swaps, by one and two months, respectively. The largest part of the market, fixed income and credit swaps, will be unaffected, and will begin being reported on October 2nd.

Lastly, in an attempt to further smooth the transition into this new and less risky form of business, the CFTC has allowed for a delay in documentation of onboarding by one month.

Regulatory Adjustment to New CFTC Ruling on Cross-Border Swaps

The impacts of the Commodities Futures Trading Commission’s (CFTC) response to cross-border swaps are yet unknown. With a 75 day period of guidance in addition to the implementation of the final ruling, this unprecedented move by the CFTC may deeply impact the market.

On Friday, July 12th, the CFTC voted 3-1 in favor of instituting final guidelines for regulating cross-border bilateral swaps. Gary Gensler, in his opening statement said that “Even though we oversee, here at the CFTC, a complex and sometimes difficult to understand market […] the questions the American people are looking for us to answer are simple: Have we lowered risk? Have we brought transparency to these markets? […] This is why reform matters.”

The presenters of the cross-border rules also went on to define certain aspects of the bill. When discussing the definition of “US-Person,” they widened the definition to include natural born US citizens, businesses with principal or primary stations in the United States and funds if they were majority owned by US Citizens. Other important aspects of these guidelines include ‘unfettered’ access to other counties’ data. According to the meeting, the CFTC has set up relationships for substituted compliance with Australia, Canada, Japan, and the EU, with ongoing talks with some entities in Switzerland and Hong Kong.

The full proceedings are available on the CFTC’s website.

CFTC and European Commission Reach Concordance on Derivatives

The tenuous issue of cross-border derivatives regulation between the United States and the European Union may be over soon, according to a press release from the CFTC today. Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), and European Commission representative Michel Berneir have announced that the two regulatory bodies may have created a ‘common path forward’ for dealing with cross-border swaps.

The European Commission and the CFTC have many advantages of developing cross-border regulations together. In light of this demonstration of international cooperation, some have hopes that the G20 promise to promote transparency in over-the-counter derivatives trading will become more of a focal point in regulation.

The Path Forward, as this plan has been anointed  includes many no-action temporary reliefs in situations where CFTC and EC rules regarding risk mitigation and recording have been considered equivalent. For example, in the case of bilateral uncleared swaps, the rules have been deemed comparable in purpose and scope by both regulatory bodies. Because of this equivalence, the CFTC has ordered a no-action time relief for the transaction-based requirements. Furthermore, the CFTC projects that foreign trade boards will be able to list swap dealings directly, if they’ve already been given no-action relief.

In addition to those no-action time-limited reliefs, the CFTC’s press release included others such as multilateral trading facilities (MTFs). The full press release can be found on the CFTC website.

Evaluation By EU of U.S. Credit Swap Rules Delayed

The European Commission has given regulators at the European Securities and Markets Authority more time to analyze United States and Japanese credit swaps. The original deadline for their analysis was June 15th, but ESMA has been given an extension until September 1st to formulate an opinion on third party clearing houses regarding OTC derivatives regulation.

Until the robustness of US credit swap policy has been reviewed, some European banks have been given more restricted access to clearing houses outside of the European Union. Because of concerns that US banking policies may not be compliant with European policies, credit swap rules have become a contentious issue between US and EU regulatory bodies, according to Bloomberg.

Since Dodd-Frank was enacted and furthered the  US Commodity Futures Trading Commission’s international reach, it has caused some compliance issues abroad. The reason for the postponement, according to a letter posted to the European Securities and Markets Authority’s website from the European Commission, is “to allow ESMA more time to take account of international on-going developments and to consider their implications fully.”

Along with reviewing United States credit rules on September 1st, Japan will also be analyzed in this report. A full schedule of ESMA’s proposed assessments of national credit swap rules can be found on their website.

SEF Rules Approval Leads to Early December Projection for Transacting all Standardized Swaps on SEFs

With the CFTC’s approval of the SEF rules last Thursday, swap users and would-be SEFs are targeting early December as the time when all swap users will be transacting standardized swaps on SEFs.

According to Reuters, the exact date is still a moving target until the CFTC publishes the rules in the Federal Register. Reuters reports that many firms expect December 9 to be the exact date, citing the final phase of the clearing mandate on September 9 as the key date.

At this point in time, sixty days after the CFTC publishes the rules in the Federal Register — which will likely be June 1 — these new would-be SEFs will receive provisional registration to execute standardized swaps while the CFTC reviews their applications.

Looking ahead, the next wave of the Dodd-Frank clearing mandate for over-the-counter derivatives begins on June 10. Participants that are already clearing, or will begin clearing on June 10, will be executing SEFs before December 9 because the CFTC requires that firms must begin using SEFs 30 days after they begin clearing.

Since the final phase of the clearing mandate is set to take place on September 9, an early December date has been marked as the time when electronic execution and clearing of OTC swaps will begin operating in unison.