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European Commission Recognizes U.S. DCMs and SEFs as "Equivalent"

Commentary by Steven Lofchie and Nihal Patel

The European Commission ("EC") announced a decision recognizing certain CFTC-regulated DCMs and SEFs as "eligible for compliance" with EU trading obligations for certain derivatives. CFTC staff recommended that the CFTC adopt a similar order exempting EU-authorized trading facilities from U.S. registration requirements. The decisions follow the recent agreement between the CFTC and EC to adopt a "common approach" to derivatives trading on certain platforms.

According to the EC, this recognition will allow for EU counterparties to trade derivatives on CFTC-authorized designated contract markets ("DCMs") and swap execution facilities ("SEFs") based in the United States. In accordance with the decision, traders will be able to use U.S. trading platforms for such transactions even as MiFID II (and its derivatives trading obligation) becomes applicable on January 3, 2018. The trading obligation will require certain derivatives transactions to be executed on EU venues or venues designated as equivalent by the EC. The European Commission noted that its decision does not affect the ability of EU counterparties to trade on CFTC-regulated DCMs and SEFs with respect to derivatives that are not subject to the EU trading obligation.

CFTC Chair J. Christopher Giancarlo urged his fellow commissioners to "act expeditiously in approving" an exemptive order for EU trading facilities. CFTC Director of the Division of Market Oversight Amir Zaidi added that the CFTC is "close behind" with its own order.

Commentary

This is a significant success. CFTC Chair Giancarlo had, at once, both reached out to the Europeans in regard to the mutual acceptance of "comparable regulations" and cautioned the Europeans against imposing regulatory requirements that would disadvantage U.S. financial intermediaries.  See CFTC Chair J. Christopher Giancarlo Criticizes "EU Plan to Invade U.S. Markets."

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Commentary

The EC implementing decision does not appear to contain caveats that would suggest that CFTC-regulated SEFs and DCMs will have any material additional obligations beyond the CFTC requirements in order to satisfy the relief. In contrast, when the CFTC adopted a comparability determination for EU margin requirements in October, there were scoping points to note that will result in continuing U.S. requirements for EU-regulated institutions.

(The EC implementing decision contains a curious discussion of securities-based derivatives. At paragraph 20, the EC notes that ongoing disclosure requirements are not relevant for the products (such as rate swaps) that are subject to the EU trading obligation. However, the EC goes on to state that security-based swaps and options on securities (neither of which trade on CFTC markets) also "ensure a high level of investor protection" because security-based swaps and options on securities may be based on issuers who provide public reports to the SEC.)

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