One day before today’s cross-border clarification deadline, the CFTC and the EU announced a breakthrough shared approach, which they are calling the “Common Path Forward”. The package of measures is intended to provide clarity, minimise inter-jurisdictional conflict and reduce the possibility of regulatory arbitrage. Like most newly-engaged couples (shotgun or otherwise), the participants had only good things to say about each other.
Commissioner Barnier said that “our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends.”
Chairman 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. I want to thank Commissioner Barnier and all his colleagues for their constructive collaboration throughout this reform process.”
The common path is a series of declarations of substitutive compliance and shared G20 intentions. Recognising the international nature of the derivatives market and their essential identity of legislative purpose, the EU and ESMA will apply the EMIR equivalence rules and the CFTC will issue no-action letters in respect of EU-regulated trades and legal entities. Highlights follow:
- CFTC to extend relief to EU trading platforms (MTF’s) if their oversight is equivalent to that for SEF’s;
- The two jurisdictions will work together to harmonise their rules concerning margins for uncleared swaps and trade repositories/trade reporting; and
- The parties recognise a material difference with respect to CCP initial margin and resolve to collaborate in minimising consequent arbitrage possibilities.
Although lacking detail, the common path memoranda do represent a landmark outbreak of harmony in this pivotal relationship, and will go some way in removing at least one major source of uncertainty.
In line with its memorandum, the CFTC issued four no-action letters relating to cross-border swaps. A brief summary follows:
- Two letters, each exempting LCH.Clearnet SA and Eurex Clearing AG for failing to register as a DCO under Section 5b(a) CEA with respect to CDS/Index CDS and exemptive relief for their US clearing members. Relief expires upon 31 December 2013, or upon an approved application to register as a DCO.
- Relief for joint jurisdiction SD/MSP’s. Market participants who are subject to both section 4s of the CEA and Article 11 of EMIR may effectively choose which rules they wish to subscribe to with respect to risk mitigation techniques for uncleared swaps.
- Expansion of previous relief with respect to trade entry onto a Foreign Board of Trade deal matching system. The letter permits US-located FBOT members to enter swap trades directly.
These four no-action letters constitute the first substantive action espoused by the common path, and will inevitably be the first of many.