U.S. and European Regulators Reach Swaps Accord

Terry Flanagan

The United States Commodity Futures Trading Commission (CFTC) and staff of the European Commission (EC) have made significant progress towards harmonizing a regulatory framework for CFTC-regulated swap execution facilities (SEFs) and EU-regulated multilateral trading facilities (MTFs), as contemplated under the Path Forward statement issued in July 2013.

“The two commissions have provided confirmation this week that a global race-to-the-top in derivatives regulation is possible,” said CFTC acting chairman Mark Wetjen. “As the CFTC moves forward with the swap trading mandate in the United States, it must and will continue to work with its counterparts in Europe and elsewhere to meet the G20 commitments and ensure that standardized trading on regulated platforms protects global liquidity formation and provides much-needed pre-trade transparency to market participants.”

Michel Barnier, European Commissioner for the Single Market and services said: “Following the trilogue agreement on MIFID2 last month, this is an important further step in implementing a joined up, consistent global approach to ensure that financial markets work for the benefit of the real economy.”

The Path Forward statement set out that the CFTC and EC would work together on extending appropriate, time-limited transitional relief to certain MTFs, in the event that the CFTC’s trade execution requirement was triggered before March 15, 2014; provided these platforms were subject to, among other things, sufficient pre- and post-trade price transparency requirements, comparable provisions providing for non-discriminatory access by market participants, and appropriate governmental oversight.

Accordingly, the CFTC and EC have engaged in further dialogue regarding the treatment of MTFs under the CFTC’s regulatory regime, building upon the common objective to rigorously and expeditiously implement the G-20 commitments, particularly with regard to mandatory trading on regulated and organized platforms.

The CFTC issued a “Conditional No-Action Letter” for qualifying MTFs from the SEF registration requirement, for parties executing swap transactions on qualifying MTFs from the trade execution mandate, and for swap dealers and major swap participants executing transactions on qualifying MTFs from requirements under the CFTC’s business conduct rules.

The CFTC has issued a short-term no-action letter to provide limited relief for all registered MTFs through March 24, 2014, in order to provide sufficient time for MTFs to identify themselves to the CFTC as a condition to the relief pursuant to the Conditional No-Action Letter.

In particular, the agreement shows how, as G20 commitments move from words to action, regulators can and should work together to ensure that their respective rules interact with each other in the most effective and efficient fashion, Barnier noted.

“This needs to be done without creating regulatory overlaps or loopholes this creating a global level playing field for operators,” he said. “Today is an important step but far from the final one on the road towards global convergence. We will continue to work closely with the U.S. authorities in implementing the Path Forward agreement.”

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