Last week the European Commission (EC) and the CFTC announced mutual recognition of each other’s derivatives trading venues, fulfilling the Common Approach announced this October the 13th, 2017 by the two regulatory agencies.
On Tuesday, December 5, 2017 the EC announced it adopted an equivalence decision to recognize certain trading venues authorized by the CFTC as compliant with the EU trading obligations for derivatives. In return, On Friday, December 8th, 2017, the CFTC issued an order that certain multilateral trading facilities (MTFs) and organized trading facilities (OTFs) authorized by the EU would be exempted from swap execution facilities (SEFs) registration with the CFTC. The CFTC order will become effective January 8th, 2018, and in the EU as well, the new Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) framework will apply as of 3 January 2018.
This mutual recognition ensures that EU counterparts can trade derivatives instruments subject to trade obligations on CFTC-authorized Designated Contract Markets (DCMs) and SEFs in the US. Likewise, US counterparts would comply with the CFTCs trade execution requirements for swaps on EU MTFs or OTFs exempted by the order.
Find the full list of DCMs adn DEFs here.
Derivatives subject to the EU trading obligation on January 8th, as designated by EU regulators are euros, dollars and pound interest rate swaps in the most common benchmark tenors, as well as index-based CDS.
CFTC Announces Mutual Recognition of Derivatives Trading Venues
The CFTC order grants exemption if a foreign swap execution facility is subject to comparable, comprehensive supervision and regulation by the appropriate governmental authorities in the facility’s home country. CFTC determined that EU-wide legal requirements establish regulatory frameworks for MTFs and OTFs, respectively, that satisfy the Commodity Exchange Act (CEA) standard for granting an exemption from the SEF registration requirement. On a press release announcing Mutual Recognition of Derivatives Trading Venues, the CFTC stated the order provides that, on a going forward basis, the EC may request that additional MTFs and OTFs that satisfy these criteria be added to the list of MTFs and OTFs that are granted exempt SEF status. When the order becomes effective, swap transactions that are subject to the CFTC’s trade execution requirement will be able to be executed on MTFs and OTFs that are listed in the order.
The List of MTFs and OTFs that are authorized and in good standing within the EU that are subject to this Exemption Order:
Trading Venue Name and Category (MTFs, OTFs)
Bloomberg Multilateral Trading Facility Limited (MTF)
BGC Brokers LP (OTF)
EBS MTF (MTF)
GFI Brokers Limited (OTF)
ICAP Global Derivatives (MTF)
ICAP Securities (OTF)
ICAP WCLK (MTF)
NEX SEF Limited (MTF)
Sunrise Brokers LLP (OTF)
Tradeweb Europe Limited (MTF)
Tullett Prebon Europe (OTF)
Tullett Prebon Europe (MTF)
Swaps subject to the trade execution requirement include the most liquid benchmark tenors in interest rate swaps denominated in dollars, euros, and pounds and index CDS.
The agreed approach to mutual recognition will allow counterparties to satisfy the EU trading obligation for derivatives on the SEFs and DCMs that the European Commission has recognized as equivalent, and will allow counterparties to satisfy the CFTC’s trade execution requirement on MTFs and OTFs that are granted exempt SEF status by the CFTC.
CFTC Chairman J. Christopher Giancarlo extended gratitude to EC Vice-President Valdis Dombrovskis and EC staff, as well as commentary on the positive influence of this decisions,
“I welcome the European Commission’s decision on equivalence for US trading venues regulated by the CFTC. It represents the third time in two years that the CFTC and the European Union have been able to work together to reach a positive equivalence decision — first in 2016 with respect to central clearinghouses, earlier this year with respect to margin requirements for uncleared swaps, and today with respect to trading venues. These decisions, including all of their relevant conditions, are significant achievements, which should be enduring, as they are essential to ensuring a strong and stable trans-Atlantic derivatives market that supports economic growth both in the European Union and the United States.”
The derivatives trading obligation was put in place as one of the G20 commitments introduced after the financial crisis, requiring that liquid derivative instruments be traded on authorized trading venues to ensure transparency. The EC and CFTC Common Approach announcement on October by CFTC Chairman J. Christopher Giancarlo and EC Vice-President Valdis Dombrovskis, signified an equivalence decision. This mutual recognition of derivatives trading venues solidified the regulatory counter parties commitment to the G20 obligation.
Find the full CFTC press release and order here.