The rally on Wall Street today spurred by the Fed indicating that its looser money policies will remain for the long term overshadows the good news that European Union regulators and the CFTC have come to major agreements over U.S. derivatives rules. This development will provide much-needed clarity for derivatives markets participants striving to keep up with over-the-counter reforms.The “Path Forward” accord governing cross-border derivatives adds a level of flexibility based on the fact that the CFTC and the European Commission “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,” according to a joint statement from the EC and CFTC.
“For bilateral, uncleared swaps, and because EU and US rules for risk mitigation are essentially identical, the CFTC plans to issue no-action relief for certain transaction-based requirements,” according to the statement. “In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.”
On the issue of derivatives execution, “the CFTC plans to permit foreign boards of trade that have received direct access no-action relief to also list swap contracts for trading by direct access to avoid market and liquidity disruption,” according to the statement.
“As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014,” say the regulators.
The relief would be for MTFs with 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,” the regulators add. “The CFTC staff will issue no-action letters to this effect.”
The CFTC will also work with the EC to consider regulatory relief for trading platforms that “achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs [swap execution facilities].” The U.S. and European regulators will review the situation in January 2014 to “assess progress.”
The European and U.S. regulators will combine efforts to promote straight through processing, and harmonize international rules for the margins of uncleared swaps. The regulators also say they have “essentially identical processes with regard to adopting mandatory clearing obligations and regulating intra-group swaps/derivatives trades.”
Both sides stress that their approaches for reporting to trade repositories are similar and that they will work to resolve remaining issues, “such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws,” according to the statement.
As for central counterparties, the CFTC rules and the European Market Infrastructure Regulation (EMIR) directive are based on international minimum standards, say the regulators. “CCP initial margin coverage is the only key material difference and the parties will work together to reduce any regulatory arbitrage opportunities,” according to the statement. “They will also endeavor to ensure that CCPs that have not yet been recognized or registered in the US or the EU will be permitted to continue their business operations.”
This is a big step forward because it starts to tackle the problem of truly harmonizing U.S. rules overseas. It will also bring relief of a different kind for operations and IT staffs at firms that have been pushing to revamp IT infrastructures and implement new business processes and workflows.
As noted in this blog many times, firms large and small will likely welcome the clarification and leeway to do as much preparation as possible for the OTC reforms on the domestic front and overseas. Recent surveys have shown that many firms are either behind or unprepared for any OTC overhauls – some buy-side firms are waiting for their sell-side counterparties to do the heavy lifting.
Such a strategy is foolhardy and most firms have gotten the message – OTC operational efficiency is the key to competitive advantage.
If they haven’t already, all players in the executed, cleared and even the traditional, bilateral OTC markets have to start clearing out the internal underbrush of data siloed in spreadsheets buried on desktops, databases that are often non-relational and disconnected, and autonomous systems that lack integration across the enterprise.
The new agreement among U.S. and European regulators removes a major stumbling block for global derivatives reform and evaporates a major excuse for inaction by securities firms. The agreement also clearly outlines the major work that many firms may still have ahead of them.
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