Dodd Frank
Subscribe to Dodd Frank's Posts

Transatlantic Derivatives Consensus: Landmark Step for EC/US Cooperation

by Simone Goligorsky and David McDonnell

On 11 July 2013, the European Commission (EC) and the United States Commodity Futures Trading Commission (CFTC) announced a high-level joint understanding, known as the “Path Forward”, which details the shared future vision on the cross-border regulation of over-the-counter (OTC) derivatives (click here for the full announcement). This is a welcome announcement, given the concerns that many market participants had regarding the possibility of certain derivative transactions being subject to regulation on both sides of the Atlantic. The Path Forward has been produced as part of the package that was developed in order to promote the transparency of OTC derivatives markets and to lower the risks associated with them. 

At the core of the Path Forward is the objective of avoiding what was viewed by some market participants as the ‘double treatment’ of derivatives, whereby the derivatives would have been subject to the simultaneous application of both European and US legislative requirements, potentially leading to inconsistency, conflicts of law, and legal uncertainty. Considering the level of similarity between the European and US regimes, the EC and CFTC have agreed that such a duplicative approach may be, to the greatest extent possible, avoided. 

Instead, the EC and CFTC will, where appropriate, defer to the regulatory requirements in either Europe or the United States, as applicable. For example, under the European Market Infrastructure Regulation (EMIR), the EC has adopted risk mitigation rules that have a high-degree of similarity to the CFTC’s business conduct standards. Important action has been taken on bilateral, uncleared swaps, so that the regulatory rules in both jurisdictions will be viewed as comparable and as comprehensive as one another. The net result is that market participants are likely to now benefit from these equivalence rules.

In addition to the progress made to date, the EC, CFTC, and the European Securities and Markets Authority (ESMA) will continue to work together, and with other global regulators, on the harmonisation of international rules on posted margins for uncleared swaps, with a view to implementing a uniform system across as many jurisdictions as possible. 

It is worth noting that while the Path Forward heralds a significant step for enhanced cross-border regulation, market stability, and confidence, it was relatively light on concrete details. As such, market participants subject to European regulations, as well as US counterparties governed by Dodd-Frank, should continue to monitor collaboration between both regulatory authorities closely.

 



European Parliament Endorses EMIR Technical Standards

by Simone Goligorsky

On February 7, 2013, it was announced that the Economic and Monetary Affairs (ECON) Committee of the European Parliament (EP) was withdrawing its objection to the technical standards (TS) for the regulation on over-the-counter derivatives, central counterparties and trade repositories, commonly known as the European Markets Infrastructure Regulation (EMIR). 

The TS supplement the level 1 text of EMIR, which came into force in August 2012.  It is the TS that define who exactly will be affected by EMIR, and how. 

Following the endorsement of the TS in December 2012 by the European Commission (EC), after they were published by the European Securities and Markets Authority in September 2012, the TS were undergoing the last review prior to their publication in the Official Journal of the European Union.  Many market participants expected the EP’s review to a procedural, rubber-stamping exercise. 

However, on January 24, 2013, it was confirmed that the ECON Committee was to publish a motion for a resolution to reject certain TS.  One of the reasons given for mooting the rejection was the view that the EC had gone beyond its remit for the TS, set out for it in the level 1 text of EMIR, when drafting the TS.

The TS in question related to matters including, inter alia:

  1. The clearing threshold for non-financial counterparties, particularly the condition that if the clearing threshold for one asset class was exceeded by a counterparty, then the counterparty would be automatically held to have exceeded the threshold for all asset classes; and
  2. The requirement for timely confirmations, in particular how this obligation would affect smaller, non-financial counterparties.

If the TS had been rejected, then the EC would have been required to put forward new TS.  This may have, in turn, have delayed the publication of the TS, and ultimately, the coming into force of EMIR. 

However, on February 7, 2013, the EP withdrew the resolution calling for the rejection of the draft TS.  The withdrawal of the objection was based on certain assurances given by the EC, including the assurance that the EC would publish frequent ‘questions and answer’ booklets to cover any matters over which there arose legal uncertainty.

EMIR has been tabled as the US equivalent of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank).  As currently drafted, market participants undertaking activities in both the US and European markets may be subject to both Dodd Frank and EMIR, requiring, them, for example, to report trades to both European and US regulators. 

To avoid market participants having to report to two sets of regulators, European regulators are meeting with their US counterparts over the course of Q1 and Q2 2013, to advise the United States that EMIR should be accepted as being as strict as Dodd Frank.  If accepted, market participants complying with EMIR would be deemed to comply with Dodd Frank, and vice versa.

As the publication of the TS will not be delayed as much as initially thought, EMIR’s [...]

Continue Reading




STAY CONNECTED

TOPICS

ARCHIVES