U.S. and Europe Make Several Moves Towards Equivalence
On Oct. 13, the Commodity Futures Trading Commission and the European Commission announced two agreements aimed at preserving cross-border access to derivatives markets ahead of MiFID II. The agreements were announced by CFTC Chairman Chris Giancarlo and EC Vice President Valdis Dombrovskis at a joint press conference in Washington.
"The European Commission has a close and constructive cooperation with the CFTC and we are determined to keep this up in future," said Dombrovskis. "This is important because financial markets are truly global. Working together is the best way to ensure their stability and resilience while avoiding market fragmentation and over-regulation."
One area of agreement covered margin on uncleared derivatives, with the purpose of avoiding a double margin requirement on cross-border trades. The EC adopted an equivalence decision regarding the U.S. framework for uncleared derivatives, and the CFTC approved a comparability determination that EU margin requirements are "comparable in outcome" to the CFTC's requirements.
The other area of agreement was a "common approach" regarding the equivalence of their regulation of derivatives trading platforms, with the goal of ensuring that market participants in one jurisdiction will be able to trade on platforms in the other jurisdiction. After agreeing on a general approach, the two sides then followed up in December with more detailed determinations.
On Dec. 5, the European Commission announced that it had recognized certain U.S. trading venues authorized by the CFTC as eligible for compliance with the EU trading obligation for derivatives. Under MiFID II, European counterparties are required to trade certain types of interest rate swaps and credit default swaps on venues in the EU or on third country venues that have been officially recognized as equivalent. The decision effectively ensures that EU counterparties can continue to use U.S. swap execution facilities to comply with this obligation.
On Dec. 8, the CFTC issued an order exempting 16 multilateral trading facilities and organized trading facilities authorized within the European Union from the requirement to register with the CFTC as swap execution facilities. The order was based on the CFTC's determination that EU legal requirements meet the CFTC's standards for "comparable" supervision and regulation.
In effect, the order allows market participants to execute swap transactions that are subject to the CFTC’s trade execution requirement on the 16 MTFs and OTFs that are listed in the order. In addition, these trading venues will be able to offer trading in swaps that are not subject to the CFTC’s trade execution requirement to U.S. person counterparties. The order does not exempt these trading venues from other requirements, however; they remain subject to certain CFTC reporting and clearing requirements.
CFTC Chairman Chris Giancarlo said the announcement "represents the third time in two years that the CFTC and the European Union have been able to work together to defer to each other’s regulatory frameworks" and added that these achievements "are essential to ensuring a strong and stable trans-Atlantic derivatives market."
