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EU, US Agree 'Path Forward' On Derivatives

by Ulrika Lomas,, Brussels

16 July 2013

The European Commission and US Commodity Futures Trading Commission (CFTC) have announced the agreement of a "Path Forward" which sets out their joint approach to cross-border derivatives.

According to the Commission, it, together with the European Securities Market Authority (ESMA) and the US Government, has made significant progress in introducing regulatory reforms. The Commission also claims that a joint collaborative effort has ensured that final rules are "essentially identical" in many places, although the regulatory calendars are not always synchronized.

European Commissioner Michel Barnier said that discussions with the CFTC team "have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends."

The Path Forward acknowledges that, as the market subject to derivatives regulations is international, there must be sufficient coordination in future. Were the global market subjected "to the simultaneous application of each other's requirements," this could lead to undesirable "conflicts of law, inconsistencies and legal uncertainty." Both parties nevertheless "share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes."

The CFTC intends to issue "no-action relief" for certain transaction-based requirements in the case of bilateral uncleared swaps. The European Union's (EU) system of "equivalence" will be applied to allow market participants to determine their own choice of rules. The CFTC will also permit foreign boards of trade, which have received direct access no-action relief, to swap contacts for trading by direct access, in order to avoid market and liquidity disruption.

The CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that its trade execution requirement is triggered before March 15, 2014. This relief would be made available to MTFs that "have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight."

Both parties will consult on proposals to extend regulatory relief to trading platforms that meet requirements and achieve regulatory outcomes comparable to those for swap execution facilities (SEFs). Similar approaches to straight-through-processing will be developed, as will harmonized international rules on margins for uncleared swaps.

Remaining issues with EU and US approaches to reporting to trade repositories will be ironed out, and negotiators will aim at resolving problems that may arise in line with conclusions reached at international fora on the subject. In addition, the Commission and CFTC will work together to reduce any regulatory arbitrage opportunities generated by central counterparties (CCPs) initial market coverage, and to ensure that CCPs not yet recognized or registered in either the EU or US can continue their business operations.

The intention is to conclude the outstanding discussions as soon as possible. The Commission and CFTC have said that they invite other jurisdictions to join in their approach and make certain that commitments made by the G20 group of nations are applied in a "sensible and rigorous way to cross-border derivatives trade."

CFTC Chairman Gary Gensler said, "With these joint understandings, together, we've taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide."

TAGS: tax | business | European Commission | law | enforcement | United States | G20 | regulation | trade | Europe

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