CFTC Comparability Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties, March 2016

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Dodd-Frank Timeline, Cross-Border Application of Swaps Provisions, CFTC
Proposal Date Comment Deadline Compliance Extension Guidance Effective Date
July 12, 2012 August 27, 2012 July 12, 2013 July 26, 2013
Dodd-Frank Timeline, Cross-Border Application of Swap Entity Provisions, SEC
Final Rule Posted Effective Date Final Rule - Non-U.S. Persons
July 9, 2014 September 8, 2014 February 10, 2016

On March 16, 2016, the CFTC unanimously approved a substituted compliance framework for dually-registered central counterparties (CCPs) located in the European Union (EU), together with a comparability determination with respect to certain EU rules. The action follows a previously announced agreement between the CFTC and the European Commission regarding dually-registered derivatives clearing organizations (DCOs)/CCPs and represents a major step in paving the way for the EU’s recognition of U.S. CCPs.<ref>CFTC Approves Substituted Compliance Framework in Follow-up to the Recent Equivalence Agreement between the US and the EU. CFTC. Retrieved on March 29, 2016.</ref>


Among the provisions of Title VII of the Dodd-Frank Act is a requirement that swaps reforms shall not apply to activities outside the United States unless those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.” The CFTC is tasked with developing a framework for oversight of the swaps market, and to adapt the Commodity Exchange Act to include swaps oversight. The SEC is tasked with developing a framework for oversight of security-based swaps, and to adapt the SEC regulations to include such oversight.

The concern is that swap trading by foreign affiliates of large financial entities pose a systemic risk to the U.S., and thus should be under CFTC jurisdiction. This guidance is meant to be the starting point for discussion with market participants regarding the structure of cross-border jurisdiction.

Substituted compliance, as defined by the Commodity Futures Trading Commission, is where the commission would permit non-U.S. swap participants swaps whose activities might bring them within the scope of certain U.S. regulations to use compliance with regulations in their home jurisdiction as a substitute for compliance with the relevant Commission regulations.<ref>CFTC Approves Comparability Determinations for Six Jurisdictions for Substituted Compliance Purposes. CFTC. Retrieved on December 23, 2013.</ref>

On December 20, 2013, the CFTC issued a determination on substituted compliance on business conduct standards for Australia, Canada, the European Union (“EU”), Hong Kong, Japan, and Switzerland.<ref>U.S. permits some foreign swaps rules, EU still unhappy. Reuters. Retrieved on December 23, 2013.</ref>

Summary of the March 2016 Determination[edit]

The Determination will allow EU CCPs already registered with the CFTC as DCOs (DCO/CCPs) and those seeking registration to provide services to US clearing members and clients while complying with certain corresponding EU requirements. It also identifies those EMIR requirements that are comparable to the corresponding CFTC requirements and comprehensive. By issuing this Determination, the CFTC further harmonizes the CFTC and EMIR regimes without risking regulatory arbitrage while also enhancing the protection of customers.

The Determination covers certain CFTC requirements for financial resources, risk management, settlement procedures, and default rules and procedures (as set forth in the Determination) by complying with corresponding requirements under EMIR.

Simultaneously, the CFTC’s Division of Clearing and Risk (DCR) issued a no-action letter providing limited relief for DCO/CCPs from the application of CFTC regulations to discrete aspects of a DCO/CCP’s non-U.S. clearing activities.

The CFTC also is streamlining the registration process for DCO/CCPs wishing to register with it.

Related Document: Compliance Determination; No-Action Letter[edit]


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