FIA Global CCP Rulebook Review Will Provide Comprehensive Guide to Clearinghouse Rules (Sept. 25, 2014)
Today, FIA Global, in cooperation with the law firms Linklaters and Milbank, Tweed, Hadley & McCloy, announced a new guide to the rules of central clearing counterparties (CCPs). The FIA Global CCP Rulebook Review is a subscription service that will provide a standardized, comprehensive overview and analysis of the rules and procedures governing certain CCPs, as well as timely updates on changes to the rules and regulatory framework. It will highlight the issues most relevant to clearing members and end-users as they evaluate evolving regulatory obligations relating to CCPs on a real-time basis.
FIA Special Report: CFTC Proposes Margin Rule, Finalizes Rule on Swaps with Utilities (Sept. 17, 2014)
The Commodity Futures Trading Commission today held an open meeting to consider two rulemakings. This was the first public meeting held by Tim Massad, the new CFTC chairman. In his opening statement, Massad stressed that both rulemakings are designed to "minimize the burden" on commercial hedgers and make sure that the CFTC's regulatory scheme "recognizes the needs and concerns of commercial end-users who depend on the derivatives markets to hedge normal business risks."
Proposed Rule for Margin Requirements on Uncleared Swaps
The CFTC unanimously approved a proposed rule that would establish initial and variation margin requirements on uncleared swaps. The proposed rule is "very similar" to the proposals issued last week by the Federal Reserve and other U.S. banking regulators and generally tracks the standards recommended last September by international regulators through IOSCO and the Basel Committee, according to CFTC staff. The CFTC's version of this rule will apply to swap dealers and major swap participants that are not subject to the oversight of other regulators such as the Federal Reserve.
Under the proposed timetable for implementation, initial margin requirements would be phased in starting Dec. 1, 2015 for the largest market participants and ending Dec. 1, 2019 for the smallest. Variation margin requirements would be effective Dec. 1, 2015. The rules would permit collateral for initial margin to include cash, sovereign debt, government-sponsored debt, investment grade debt, including corporate and municipal bonds, equities, and gold. Variation margin, on the other hand, would be limited to cash.
The proposed requirements only apply to trades among swap dealers and other financial entities and do not apply to commercial end-users. The proposal includes a carve-out for financial entities that have less than $3 billion of gross notional exposure in uncleared swaps, which is a significantly lower level than what was recommended by the IOSCO/Basel Committee. This threshold calculation would be calculated at the consolidated corporate group level, rather than at an entity level, and would include physically settled foreign exchange swaps and forwards, even though these products are not subject to the proposed margin requirements.
Final Rule for Utility Swaps
The CFTC unanimously approved a final rule aimed at preserving the ability of natural gas and electricity utilities to enter into swaps transactions to hedge their risks. CFTC staff explained during the open meeting that the rule responds to concerns raised by utilities that the number of counterparties willing to enter into swaps with them has been reduced because some of these counterparties do not want to exceed the CFTC'sde minimis threshold for swaps with municipal utilities, federal agencies and other governmental "special entities," which would require them to register as swap dealers. That threshold is set at $25 million, much lower than the $8 billion threshold that applies to swaps dealing generally. The final rule permits a firm to exclude trades with "utility special entities" in calculating whether its trading exceeds the $25 million special entity de minimis threshold.
CFTC Chairman Massad said this rule is an example of the "fine-tuning" process needed for the regulatory framework established by Dodd-Frank. The final rule puts into a more permanent form the relief previously granted in a series of no-action letters that provided temporary relief.
FIA Special Report: CFTC's Massad Discusses Talks with EU on CCP Recognition (Sept. 17, 2014)
Tim Massad, the new chairman of the Commodity Futures Trading Commission, today offered some insights on the ongoing discussions between the CFTC and European regulators on the issue of clearinghouse recognition.
In a statement given during an open meeting at the CFTC to discuss two unrelated rulemakings, Massad said he was "hopeful" that the two sides could reach an agreement soon. On the other hand, he reaffirmed the CFTC's view that "dual registration" is the right approach and urged European regulators to recognize U.S. clearinghouses "to avoid any potential for market disruption."
As required by the European Market Infrastructure Regulation, European regulators are assessing whether the regulation and oversight of clearinghouses in foreign jurisdictions is "equivalent" to the regulatory regime in Europe. If equivalence is not granted for the U.S. by Dec. 15, European banks that are members of U.S. clearinghouses will become subject to much higher capital requirements, which may cause some of these clearing firms to pull back from the U.S. markets. European regulators have indicated that the decision to grant equivalence to the U.S. is tied to a corresponding willingness by the U.S. to recognize European clearinghouses without requiring those clearinghouses to register with the CFTC or comply with duplicative CFTC rules.
Massad explained that in his view the dual registration approach is necessary in order to meet Dodd-Frank requirements and that this approach has worked well to protect customers. He also noted that two European clearinghouses are already registered with the CFTC, and he commented that dual registration has not prevented them from becoming globally important or attracting U.S. customers.
The main issue that is now being discussed, he said, is to make sure that dual registration "does not create conflicts and inconsistencies." He added that the talks are focused specifically on how to achieve the EMIR requirement for "effective recognition" within the dual registration framework.
"We are looking at whether particular regulatory objectives that we have can be met through the regulation and oversight of the home country regulator," Massad said. "We are also exploring ways to enhance cooperation in the joint supervision of dually registered clearinghouses. I am hopeful we can reach agreement soon."
FIA Special Report: Court Dismisses Part of CFTC Cross-Border Case, Orders Cost-Benefit Review (Sept. 16, 2014)
On Sept. 16, a federal judge granted a motion to dismiss, in part, a lawsuit filed against the Commodity Futures Commission to overturn its guidance related to the application of Title VII in the Dodd-Frank Act to cross-border transactions. In addition, the court partially granted summary judgment for both the plaintiffs and the defendant, remanding some of the challenged rules back to the agency for further review.
U.S. District Judge Paul Friedman dismissed the part of the case challenging the cross-border guidance but ordered the CFTC to assess the costs and benefits of its extraterritorial application of a range of rules, including reporting and record-keeping rules, swap dealer registration requirements, the swap dealer definition and swap execution facility regulations. The judge explained that the CFTC's error was one of form and not substance, and it would need only to provide a reasoned explanation of why its consideration of the costs and benefits does not justify a change in the cross-border requirements. Further, the court granted summary judgment to the CFTC, affirming the challenged rules relating to large trader reporting, straight-through processing and clearing determinations.
The lawsuit was filed in December by the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers. The organizations argued, among other things, that the CFTC did not follow required procedures when drafting rules when it issued its cross-border guidance.
For further information, please contact Jackie Mesa.
Statement from FIA President and CEO Walt Lukken on the Resignation of CFTC Commissioner Scott O’Malia (July 21, 2014)
The Commodity Futures Trading Commission announced today that Commissioner Scott O’Malia will step down later this month. FIA issued the following statement in response to the announcement.
"On behalf of FIA, I want to thank Commissioner O’Malia for his energy, enthusiasm and commitment to public service," said FIA President and Chief Executive Officer Walt Lukken. "Scott was always willing to roll up his sleeves and dive into complex regulatory issues, and under his leadership the CFTC’s Technology Advisory Committee has developed into a remarkably effective forum for thoughtful discussion on the technological innovations that are transforming our industry. I also want to thank him for his efforts to bring the end-user perspective into the regulatory dialogue, particular with respect to Dodd-Frank, and for his emphasis on the value of empirical data in the rule-making process. I wish him all the best in the next phase of his career.”
FIA is the leading trade organization for the futures, options and cleared swaps markets worldwide. FIA’s membership includes clearing firms, exchanges, clearinghouses and trading firms from more than 25 countries as well as technology vendors, lawyers and other professionals serving the industry. FIA’s mission is to support open, transparent and competitive markets, protect and enhance the integrity of the financial system, and promote high standards of professional conduct. As the principal members of derivatives clearinghouses worldwide, FIA’s member firms play a critical role in the reduction of systemic risk in the global financial markets. FIA and its affiliates FIA Europe and FIA Asia make up the global alliance FIA Global, which seeks to address the common issues facing their collective memberships. For more information, please contact Heather Vaughan (hvaughan@FIA.org)at (202) 466-5460 or visit the FIA website at www.FIA.org.