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CFTC and European Commission Agree on Swap Exchange Trading
Practical Law Legal Update 3-557-7325 (Approx. 4 pages)
CFTC and European Commission Agree on Swap Exchange Trading
by Practical Law Finance
| Published on 13 Feb 2014 • European Union, USA (National/Federal) |
The CFTC and the European Commission (EC) have issued a joint statement announcing the progress made towards harmonizing a regulatory framework for CFTC-regulated swap execution facilities (SEFs) and EU-regulated multilateral trading facilities (MTFs), as envisaged in the Path Forward Statement issued by the CFTC and the EC in July 2013. The CFTC also issued two no-action letters providing related relief.
On February 12, 2014, the CFTC issued two no-action letters and published a statement jointly with the European Commission (EC) announcing the progress made towards harmonizing a regulatory framework for CFTC-regulated swap execution facilities (SEFs) and EU-regulated multilateral trading facilities (MTFs), as envisaged in the Path Forward Statement (PFS) issued by the CFTC and the EC in July 2013 (see Legal Update, CFTC and EU Reach Accord on Derivatives Regulation; CFTC Issues Cross-border Guidance and Relief). The statement and the no-action letters clarify that US entities can continue trading swaps for which a CFTC exchange-trading mandate has become effective on non-US swaps platforms that are not SEFs (or DCOs) registered with the CFTC, provided these platforms are MTFs that meet certain conditions, listed below.
For details on which swaps must be exchange traded under Title VII of the Dodd-Frank Act, see Legal Update, MAT Summary: CFTC Swap Exchange-trading Mandates and Effective Dates.
In connection with this, the CFTC issued the following two no-action letters (dated February 12, 2014) providing relief to EU-regulated MTFs and to market participants transacting on these MTFs:
- No-action Letter 14-16 (referred to as the “Conditional No-Action Letter”) provides no-action relief for:
- qualifying MTFs from the SEF registration requirement under section 5h(a)(1) of the Commodity Exchange Act (CEA);
- parties executing swap transactions on qualifying MTFs from the trade execution mandate under CEA section 2(h)(8); and
- swap dealers (SDs) and major swap participants (MSPs) executing swap transactions on qualifying MTFs from certain requirements under the CFTC’s business conduct rules and for which these registrants otherwise would receive or be subject to similar regulatory treatment if executing swap transactions on SEFs.
Among other things, to be eligible for the conditional no-action relief, an MTF would need to provide;- a multilateral trading scheme;
- a sufficient level of pre-trade and post-trade price transparency;
- non-discriminatory access by market participants; and
- an appropriate level of oversight.
EU-regulated MTFs currently regulated under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) are expected to meet the CFTC requirements under the conditions set out in the Conditional No-Action Letter. - No-action Letter 14-15 provides limited relief for all registered MTFs through March 24, 2014, in order to provide sufficient time for MTFs to identify themselves to the CFTC (which is a condition to the relief) and comply with certain other conditions for obtaining relief under No-Action Letter 14-16 (discussed above).
The PFS specified that the CFTC and the EC would work together to extend 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 certain conditions were met. This did occur, as the CFTC's first trade execution mandate becomes effective on February 15, 2014 (see Legal Update, Mandatory Exchange Trading of Interest Rate Swaps to Begin on February 15, 2014). The CFTC and the EC have since engaged in further dialogue regarding the treatment of MTFs under the CFTC's regulatory regime.
The joint statement notes that, separately, the CFTC's Division of Market Oversight is currently developing a rulemaking to set out a process under section 5h(g) of Commodity Exchange Act for foreign-based swaps trading platforms to seek appropriate regulatory treatment under US law. The rulemaking is based on authority provided under the Dodd-Frank Act and builds on the framework set out in No-action Letter 14-16, which will expire on the effective date of any such final rulemaking.
In addition, the joint statement mentions the EU trialogue agreement reached on MiFID II in January 2014, highlighting the fact that the new rules agreed implement a number of G20 commitments, such as the introduction of a trading obligation for derivatives, ensuring they are traded on transparent and multilateral venues (see Legal update, Trialogue agreement on MiFID II).
For information on US and EU regulation of derivatives trading, see Practice Notes, Summary of the Dodd-Frank Act: Swaps and Derivatives and EMIR: overview.