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CFTC, EU Make Comparability Determinations on Margin Requirements for Uncleared Swaps

Commentary by Steven Lofchie and Nihal Patel

The CFTC approved a comparability determination that European Union ("EU") margin requirements for uncleared swaps are comparable in outcome to relevant CFTC Regulations. The European Commission ("EC") announced a similar equivalence decision that the CFTC uncleared margin rules are comparable to the EU's requirements.

The CFTC determination generally allows swap dealers that comply with the EU margin requirements, in circumstances enumerated in the CFTC Regulation 23.160, to be deemed to be in compliance with CFTC requirements. Such swap dealers would remain subject to CFTC examination and enforcement authority. CFTC Letter 17-22, which extended exemptive relief to certain swap dealers that are subject to both U.S. and European margin requirements for uncleared swaps, is no longer applicable.

In addition, the CFTC announced that the CFTC and the EC have agreed to a "common approach" for certain authorized trading venues. Under the common approach, the CFTC plans to grant relief to certain EU trading venues from the swap execution facility ("SEF") registration requirement, provided they satisfy the "comparable and comprehensive" standard for exemptive relief under CEA Section 5h(g). The EU would propose a corresponding equivalence decision recognizing CFTC-authorized SEFs and designated contract markets as eligible venues.

CFTC Chair J. Christopher Giancarlo characterized the cooperative efforts as an important step in cross-border harmonization:

"These cross-border measures will provide certainty to market participants. It will ensure that our global markets are not stifled by fragmentation, inefficiencies, and higher costs. Indeed these measures are critical to maintaining the integrity of our swaps markets."

Commentary

This is a significant move by the CFTC. It improves relationships with the Europeans and it accomplishes Chair Giancarlo's goals of facilitating the ability of firms to transact globally. It undoes the geographic market fragmentation that had resulted from the post-Dodd-Frank regulatory regime. The next priority should be to improve the rules for trading on U.S. swap execution facilities. Such a step would benefit the competitiveness of the United States as a financial center.

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Commentary

Margin

Under CFTC Regulation 23.160, substituted compliance can apply for (1) U.S.-based or U.S.-guaranteed swap dealers, as to the posting of initial margin to non-U.S. swap dealers; and (2) non-U.S. swap dealers, for all aspects, except that with respect to transactions with U.S.-based or U.S.-guaranteed swap dealers, substituted compliance is available only for the collection of initial margin.

The CFTC determination generally finds the EU margin requirements to be "comparable" for substituted compliance purposes, with two notable exceptions. First, an EU-based swap dealer that transacts in "swaps" that are not "OTC derivatives" regulated under EMIR must margin such swap transactions in accordance with the CFTC rules. In addition, if a counterparty is subject to the CFTC margin requirements (e.g., a "financial end user") but not subject to EMIR margin requirements (e.g., an "NFC-"), then that counterparty must still be margined in accordance with the CFTC rules. 

This makes some policy sense, in that the scope differences could result in a competitive disadvantage to U.S. swap dealers. However, it does not seem necessary to require that CFTC margin requirements apply to the relationship. If the CFTC is comfortable with the EU margin requirements as comparable from a policy perspective, it should be comfortable with EU-based firms applying EMIR rules as though they applied to the products and counterparties where the scope of the rules differ.

It remains to be seen what the approach will be for the prudential regulators' swap margin rules. The EC equivalence determination only applies to the CFTC rules.

Trading Venues

The announcement of intent from the U.S. and EU authorities is a good first step towards facilitating more choices for market participants and greater market liquidity by allowing trading platforms to offer their services to a broader group of participants without having to worry about potentially duplicative regulation. The devil is in the details.

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Related Articles

  • CFTC Staff Extends Margin Relief to EMIR-Regulated Swap Dealers

    The CFTC Division of Swap Dealer and Intermediary Oversight extended time-limited no-action relief to swap dealers subject to both U.S. and European margin requirements for uncleared swaps. The relief was extended from May 8, 2017 until November 7, 2017.

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