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EMIR: Decision on equivalence of US CFTC regime comes into force

EMIR: Decision on equivalence of US CFTC regime comes into force

  • Europe
  • Financial services and markets regulation - Briefings and articles

03-11-2017

The European Commission has decided that certain rules in effect in the USA in respect of operational risk mitigation techniques and margin requirements for uncleared OTC derivatives contracts are equivalent to corresponding EU rules

Background

Article 11 of the European Market Infrastructure Regulation[1] (“EMIR”) sets out the risk mitigation techniques that must be adopted by in-scope EU entities where they enter into OTC derivatives contracts that are not cleared by a central counterparty (“CCP”).

The risk mitigation techniques comprise:

  1. operational risk mitigation techniques: the timely confirmation, portfolio compression and reconciliation of OTC derivative contracts not cleared by a CCP and the valuation and dispute resolution obligations applicable to those contracts; and
  2. margin requirements: the obligations with respect to the exchange of margin between counterparties.

The detailed rules regarding the operational risk mitigation techniques and margin for uncleared derivatives contracts are contained in regulatory technical standards[2] which supplement EMIR.

Under Article 13 of EMIR, the Commission is empowered to adopt decisions declaring that the legal, supervisory and enforcement arrangements of a third country are equivalent to the requirements laid down in Article 11 of EMIR. The Commission has published such a decision in respect of operational risk mitigation techniques and certain margin requirements of the USA.

Commission Implementing Decision

The Commission Implementing Decision[3] was published in the Official Journal on 14 October 2017 (the “Commission Implementing Decision”). The Commission Implementing Decision can be found here.

The Commission has decided that certain legal, supervisory and enforcement arrangements applicable in the USA for OTC derivative contracts contained in title VII of the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and in the specific implementing rules adopted by the Commodity Futures Trading Commission (“CFTC Regulations”) are equivalent to corresponding rules in force in the EU under EMIR.

The relevant rules contained in the Dodd Frank Act and the CFTC Regulations are applied to derivatives contracts regulated as “swaps” as defined in section 1a(47) of the Commodity Exchange Act (the “CEA”). Equivalency in the EU only extends to the treatment of “swaps”. To the extent that derivatives contracts fall within the definition of “OTC derivative” as used in EMIR but fall outside the CEA definition of “swap” (for example physically settled foreign exchange transactions) such derivatives contracts would need to be treated as if they were “swaps” by both the in-scope EU and US entity that are a party to them in order to benefit from equivalency.

The relevant EMIR requirements and equivalent US requirements are set out in the table below.

Requirements

EMIR Requirement

Equivalent US requirement

Operational risk mitigation techniques

Article 11(1) and (2) of Regulation (EU) No 648/2012

Sub-part I of Part 23 of the CFTC Regulations

Margin requirements

Article 11(3) of Regulation (EU) No 648/2012

The Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants published in January 2016 (‘final margin rule’) and the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants — Cross Border Application of the Margin Requirements (‘cross-border margin rule’)

 

An in-scope EU entity may treat the US requirements as equivalent if its counterparty to an OTC derivatives transaction is:

  • established in the USA;
  • registered with the CFTC as a swap dealer or major swap participant; and
  • in respect of the margin requirements only, subject to the relevant CFTC Regulations.

There are separate rules in respect of the mandatory exchange of margin applicable to US entities regulated by a US prudential regulator. These rules are not deemed equivalent to the relevant rules in EMIR in the Commission Implementing Decision.

Considerations for entities established in the EU

Even though both the EMIR and the CFTC Regulations are based on common international standards, variations exist between the two.

Prior to the Commission Implementing Decision coming into force, in practice, EU entities were also required to comply with the margin requirements that apply to their US based counterparties. Documentation between an in-scope entity established in the EU and an in-scope entity established in the USA therefore needed to ensure that the strictest of the applicable rules contained in EMIR and the CFTC Regulations were applied in order for both parties to be in a position to comply with their regulatory requirements.

The Commission Implementing Decision will allow market participants established in the EU to comply with equivalent CFTC Regulations in place of the requirements under EMIR.

In order to benefit from equivalency, EU entities should ensure that the documentation in place between the parties complies with the CFTC Regulations and should undertake the necessary due diligence and/or obtain contractual comfort in order to verify that their counterparties are registered with the CFTC as a swap dealer or major swap participant and are, in respect of the margin requirements, subject to the CFTC Regulations.


[1] Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives 

[2]  Commission Delegated Regulation (EU) 149/2013 of 19 December 2016 and Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016

[3] (EU) 2017/1857 of 13 October 2017 on the recognition of the legal, supervisory and enforcement arrangements of the USA for derivatives transactions supervised by the Commodity Futures Trading Commission as equivalent to certain requirements of Article 11 of Regulation (EU) No 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories (EMIR)

 

 

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