Source: https://www.federalregister.gov/documents/2013/12/27/2013-30981/comparability-determination-for-the-european-union-certain-transaction-level-requirements
Timestamp: 2017-08-18 14:53:53
Document Index: 519890145

Matched Legal Cases: ['§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', 'art 43', 'art 43', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', 'Art. 12', 'Art. 12', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', '§\u200923', 'art 23', '§\u200923', '§\u200923', 'art 23', 'Art. 11', 'Art 15', '§\u200923', '§\u200923', '§\u200923']

Federal Register :: Comparability Determination for the European Union: Certain Transaction-Level Requirements
78878-78890 (13 pages)
CFTC-2013-0110
1. Portfolio Reconciliation (§ 23.502)
2. Portfolio Compression (§ 23.503)
B. Trade Confirmation (§ 23.501)
C. Swap Trading Relationship Documentation (§ 23.504)
D. Daily Trading Records (§ 23.202)
https://www.federalregister.gov/d/2013-30981 https://www.federalregister.gov/d/2013-30981
The following is the analysis and determination of the Commodity Futures Trading Commission (“Commission”) regarding certain parts of a joint request by the European Commission (“EC”) and the European Securities and Markets Authority (“ESMA”) that the Commission determine that laws and regulations applicable in the European Union (“EU”) provide a sufficient basis for an affirmative finding of comparability with respect to the following regulatory obligations applicable to swap dealers (“SDs”) and major swap participants (“MSPs”) registered with the Commission: (i) swap trading relationship documentation; (ii) swap portfolio reconciliation and compression; (iii) trade confirmation; and (iv) daily trading records (collectively, the “Business Conduct Requirements”).
Gary Barnett, Director, 202-418-5977, gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202-418-5949, ffisanich@cftc.gov, and Ellie Jester, Special Counsel, 202-418-5874, ajester@cftc.gov, Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
In addition to the Guidance, on July 22, 2013, the Commission issued the Start Printed Page 78879Exemptive Order Regarding Compliance with Certain Swap Regulations (the “Exemptive Order”).[2] Among other things, the Exemptive Order provided time for the Commission to consider substituted compliance with respect to six jurisdictions where non-U.S. SDs are currently organized. In this regard, the Exemptive Order generally provided non-U.S. SDs and MSPs (and foreign branches of U.S. SDs and MSPs) in the six jurisdictions with conditional relief from certain requirements of Commission regulations (those referred to as “Transaction-Level Requirements” in the Guidance) until the earlier of December 21, 2013, or 30 days following the issuance of a substituted compliance determination.[3] However, the Commission provided only transitional relief from the real-time public reporting requirements under part 43 of the Commission's regulations until September 30, 2013, stating that “it would not be in the public interest to further delay reporting under part 43 . . . .” [4] Similarly, the Commission provided transitional relief only until October 10, 2013, from the clearing and swap processing requirements (as described in the Guidance), stating that, “[b]ecause SDs and MSPs have been committed to clearing their [credit default swaps] and interest rate swaps for many years, and indeed have been voluntarily clearing for many years, any further delay of the Commission's clearing requirement is unwarranted.” [5] The Commission did not make any comparability determination with respect to clearing and swap processing prior to October 10, 2013, or real-time public reporting prior to September 30, 2013.
On May 7, 2013, the EC and ESMA (collectively, the “applicant”) submitted a request that the Commission determine that laws and regulations applicable in the EU provide a sufficient basis for an affirmative finding of comparability with respect to certain Transaction-Level Requirements, including the Business Conduct Requirements.[6] The applicant provided Commission staff with an updated submission on August 6, 2013. On November 11, 2013, the application was further supplemented with corrections and additional materials. The following is the Commission's analysis and determination regarding the Business Conduct Requirements, as detailed below.
In addition to the Business Conduct Requirements described below, the applicant also requested a comparability determination with respect to law and regulations applicable in the EU governing (1) clearing and swap processing;[7] and (2) real-time public reporting. The Commission declines to take up the request for such comparability determination at this time due to the Commission's view that there are not laws or regulations applicable in the EU to compare with the requirements of the Commission's regulations on mandatory clearing and swap processing, and real-time public reporting. The Commission may address these requests in a separate notice at a later date in consequence of further developments in the law and regulations applicable in the EU.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act[8] (“Dodd-Frank Act” or “Dodd-Frank”), which, in Title VII, established a new regulatory framework for swaps.
Section 722(d) of the Dodd-Frank Act amended the CEA by adding section 2(i), which provides that the swap provisions of the CEA (including any CEA rules or regulations) apply to cross-border activities when certain conditions are met, namely, when such activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” or when they contravene Commission rules or regulations as are necessary or appropriate to prevent evasion of the swap provisions of the CEA enacted under Title VII of the Dodd-Frank Act.[9]
In the three years since its enactment, the Commission has finalized 68 rules and orders to implement Title VII of the Dodd-Frank Act. The finalized rules include those promulgated under section 4s of the CEA, which address registration of SDs and MSPs and other substantive requirements applicable to SDs and MSPs. With few exceptions, the delayed compliance dates for the Commission's regulations implementing such section 4s requirements applicable to SDs and MSPs have passed and new SDs and MSPs are now required to be in full compliance with such regulations upon registration with the Commission.[10] Notably, the requirements under Title VII of the Dodd-Frank Act related to SDs and MSPs by their terms apply to all registered SDs and MSPs, irrespective of where they are located, albeit subject to the limitations of CEA section 2(i).
In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the applicable requirement(s) under the CEA and Commission regulations, the Commission will take into consideration all relevant Start Printed Page 78880factors, including but not limited to, the comprehensiveness of those requirement(s), the scope and objectives of the relevant regulatory requirement(s), the comprehensiveness of the foreign regulator's supervisory compliance program, as well as the home jurisdiction's authority to support and enforce its oversight of the registrant. In this context, comparable does not necessarily mean identical. Rather, the Commission would evaluate whether the home jurisdiction's regulatory requirement is comparable to and as comprehensive as the corresponding U.S. regulatory requirement(s).[11]
Upon a comparability finding, consistent with CEA section 2(i) and comity principles, the Commission's policy generally is that eligible entities may comply with a substituted compliance regime subject to any conditions the Commission places on its finding, and subject to the Commission's retention of its examination authority and its enforcement authority.[12]
In this regard, the Commission notes that a comparability determination cannot be premised on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction, but rather on whether information relevant to the Commission's oversight of an SD or MSP would be directly available to the Commission and any U.S. prudential regulator of the SD or MSP.[13] The Commission's direct access to the books and records required to be maintained by an SD or MSP registered with the Commission is a core requirement of the CEA[14] and the Commission's regulations,[15] and is a condition to registration.[16]
On May 7, 2013, the EC and ESMA submitted a request that the Commission assess the comparability of laws and regulations applicable in the EU with the requirements of the CEA and the Commission's regulations, and that a determination be made on the extent to which SDs and MSPs in the EU can rely on substituted compliance.[17] The applicant provided Commission staff with an updated submission on August 6, 2013. On November 11, 2013, the application was further supplemented with corrections and additional materials.
As represented to the Commission by the applicant, swap activities in the EU member states is governed primarily by the European Market Infrastructure Regulation (“EMIR”).[18]
EMIR and the Regulatory Technical Standards (“RTS”) are regulations with immediate, binding, and direct effect in all EU member states (i.e., no transposition into domestic law is required). EMIR entered into force on August 16, 2012.
Commission Delegated Regulation (EU) No 149/2013 of December 19, 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a central counterparty (“CCP”) (“OTC RTS”) entered into force on March 15, 2013.
Financial counterparties (“FCs”), Article 2(8) EMIR: all types of counterparties established in the EU—regardless of size or activity—that are financial in nature and authorized as such: credit institutions, insurers/reinsurers, pension funds, and hedge funds.
Non-financial counterparties (“NFCs”), Article 2(9) EMIR: all types of counterparties established in the EU that do not meet the definition of an FC (e.g., corporates, certain SPVs).
Non-financial counterparties above the clearing threshold (“NFCs+”), Non-financial counterparties below the clearing threshold (“NFCs-”):
However, transactions objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the NFC or its group (i.e., hedges) do not count towards the clearing threshold.[19] Under the hedging definition both portfolio and macro hedging are allowed.
Certain requirements of EMIR and the RTS are subject to delayed implementation. EMIR Article 11 and Start Printed Page 78881RTS Articles 12 to 17 are subject to a phase-in period:
Markets in Financial Instruments Directive (“MiFID)”:[20] MiFID is a directive and in accordance with the Treaty on the Functioning of the European Union, all member states of the EU are legally bound to implement the provisions of MiFID by November 1, 2007, by transposing them into their national laws. MiFID applies in particular to investment firms, which comprise any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. Investment services and activities means any of the services and activities listed in Section A of Annex I of MiFID relating to any of the instruments listed in Section C of Annex I of MiFID. Section C of Annex 1 refers explicitly to swaps as well as “other derivative financial instruments.”
Due to the requirement that each EU member state transpose MiFID into its national law, the comparability determinations in this notice are based on the representations of the applicant to the Commission that (i) each member state of the EU where an SD or MSP would seek to rely on substituted compliance on the basis of the comparability of the MiFID standards has completed the process of transposing MiFID into its national law;[21] (ii) such national laws have transposed MiFID without change in any aspect that is material for a comparability determination contained herein; and (iii) such transposed law is in full force and effect as of the time that any SD or MSP seeks to rely on a relevant comparability determination contained herein. The Commission notes that to the extent that any of the foregoing representations are incorrect, an affected comparability determination will not be valid.[22]
In addition to MiFID, the applicant noted that there are a number of proposed laws and regulations that, when implemented, would affect the regulation of SDs and MSPs in the EU.[23]
In doing its comparability analysis, the Commission may determine that no comparability determination can be made[28] and that the non-U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to its foreign branches, or non-registrant, to the extent Start Printed Page 78882applicable under the Guidance, may be required to comply with the CEA and Commission regulations.
Finally, the Commission generally will rely on an applicant's description of the laws and regulations of the foreign jurisdiction in making its comparability determination. The Commission considers an application to be a representation by the applicant that the laws and regulations submitted are in full force and effect, that the description of such laws and regulations is accurate and complete, and that, unless otherwise noted, the scope of such laws and regulations encompasses the swaps activities[31] of SDs and MSPs[32] in the relevant jurisdictions.[33] Further, as stated in the Guidance, the Commission expects that an applicant would notify the Commission of any material changes to information submitted in support of a comparability determination (including, but not limited to, changes in the relevant supervisory or regulatory regime) as, depending on the nature of the change, the Commission's comparability determination may no longer be valid.[34]
The Guidance provided a detailed discussion of the Commission's policy regarding the availability of substituted compliance[35] for the Business Conduct Requirements.
In the Guidance, the Commission stated that, in connection with a determination that substituted compliance is appropriate, it would expect to enter into an appropriate memorandum of understanding (“MOU”) or similar arrangement[36] with the relevant foreign regulator(s). Although existing arrangements would indicate a foreign regulator's ability to cooperate and share information, “going forward, the Commission and relevant foreign supervisor(s) would need to establish supervisory MOUs or other arrangements that provide for information sharing and cooperation in the context of supervising [SDs] and MSPs.”[37]
Accordingly, the Commission is negotiating such a supervisory arrangement with each applicable foreign regulator of an SD or MSP. The Commission expects that the arrangement will establish expectations for ongoing cooperation, address direct access to information,[38] provide for Start Printed Page 78883notification upon the occurrence of specified events, memorialize understandings related to on-site visits,[39] and include protections related to the use and confidentiality of non-public information shared pursuant to the arrangement.
The following section describes the requirements imposed by specific sections of the CEA and the Commission's regulations for the Business Conduct Requirements in the “risk mitigation and transparency” category that are the subject of this comparability determination and the Commission's regulatory objectives with respect to such requirements. Immediately following a description of the requirement(s) and regulatory objective(s) of the specific Business Conduct Requirements that the requestor submitted for a comparability determination, the Commission provides a description of the foreign jurisdiction's comparable laws, regulations, or rules and whether such laws, regulations, or rules meet the applicable regulatory objective.
CEA section 4s(i) directs the Commission to prescribe regulations for the timely and accurate processing and netting of all swaps entered into by SDs and MSPs. Accordingly, pursuant to CEA section 4s(i), the Commission adopted §§ 23.502 and 23.503, which require SDs and MSPs to perform portfolio reconciliation and compression, respectively, for all swaps.[40]
Commission Requirement: Regulation 23.502 provides standards for the timely and accurate confirmation, processing, and valuation of uncleared swaps by SDs and MSPs. The regulation requires SDs and MSPs to engage in portfolio reconciliation,[41] which is a post-execution processing and risk management technique that is designed to: (i) identify and resolve discrepancies between the counterparties with regard to the terms of a swap after execution and during the life of the swap; and (ii) identify and resolve discrepancies between the counterparties regarding the valuation of the swap.
Regulatory Objective: The Commission's portfolio reconciliation rule is designed to ensure accurate confirmation of a swap's terms and to identify and resolve any discrepancies between counterparties regarding the valuation of the swap. Given that arriving at a daily valuation is one of the building blocks for the margin regulations and is essential for the mitigation of risk posed by swaps, the regulations are aimed at ensuring that valuation disputes are resolved in a timely manner. Disputes related to confirming the terms of a swap, as well as swap valuation disputes impacting margin payments, have long been recognized as a significant problem in the OTC derivatives market, and portfolio reconciliation is widely recognized as an effective means of identifying and resolving these disputes. By identifying and managing mismatches in key economic terms and valuation for individual transactions across an entire portfolio, the regulations are aimed at achieving a process in which overall risk can be Start Printed Page 78884identified and reduced. The frequency of reconciliation of material terms and valuations of each swap required by the regulations will ensure the risk-reducing benefits of reconciliation by presenting a consolidated view of counterparty exposure down to the transaction level. The frequency with which portfolio reconciliation must be performed is a key component of this regulation.
Commission Determination: Pursuant to the foregoing standards under EMIR, FCs and NFCs must agree in writing with each of their OTC derivatives counterparties on the terms on which portfolios will be reconciled,[42] which corresponds to the requirement in Commission regulation 23.502(a) and (b) that SDs and MSPs agree in writing with each counterparty (financial and non-financial) on the terms for conducting portfolio reconciliation.
The EMIR standards require portfolio reconciliation covering key trade terms of each OTC derivative contract, including at least the valuation of each contract,[43] which corresponds to the requirements under Commission regulation 23.502 that discrepancies in material terms and valuations be resolved.
Frequency of reconciliation required under the EMIR standards for FCs and NFCs+ is daily when the number of outstanding OTC derivative contracts between counterparties is 500 or more, weekly when the number of outstanding OTC derivative contracts between counterparties is greater than 50 and less than 500, and quarterly when the number of OTC derivative contracts between counterparties is 50 or less,[44] which corresponds with the frequency required of SDs and MSPs outlined above with respect to portfolios with other SDs and MSPs. EMIR requires reconciliation with NFCs- less frequently; quarterly for portfolios of more than 100 transactions and annually otherwise[45] —which corresponds with the requirement of Commission regulation 23.502(b)(3).
The EMIR standards require FCs to report to the relevant competent authority any disputes between counterparties relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than €15 million and outstanding for at least 15 business days,[46] while Commission regulation 23.502(c) has a similar reporting requirement for disputes of at least $20 million outstanding from three to five days, depending on counterparty type. The EMIR standards, similar to § 23.502(a)(5), require FCs and NFCs to have detailed procedures and processes for resolving disputes related to valuation.
Generally identical in intent to § 23.502, the EMIR portfolio reconciliation standards are designed to ensure that valuation disputes are recognized and resolved in a timely manner. This regular reconciliation will assist in identifying and resolving discrepancies, which in turn will aid the entities in their collateralization and risk management.
Commission Requirement: Portfolio compression is a post-trade processing and netting mechanism whereby substantially similar transactions among two or more counterparties are terminated and replaced with a smaller number of transactions of decreased notional value. Portfolio compression is intended to ensure timely and accurate processing and netting of swaps,[47] and is widely acknowledged as an effective risk mitigation tool.[48]
Pursuant to § 23.503, an SD/MSP must establish policies and procedures for terminating fully offsetting uncleared swaps, when appropriate; for periodically participating in bilateral and multilateral compression exercises for uncleared swaps with other SDs/MSPs, when appropriate; and for engaging in such exercises for uncleared swaps with non-SDs/MSPs upon request.
Comparable EU Law and Regulations: The applicant has represented to the Commission that the following provisions of law and regulations applicable in the EU are in full force and effect in the EU, and comparable to and as comprehensive as section 4s(i) of the CEA and Commission regulation 23.503:Start Printed Page 78885
Commission Determination: The EMIR standards specified above require FCs and NFCs with 500 or more OTC uncleared derivative contracts outstanding with a counterparty to have procedures to regularly, and at least twice a year, analyze the possibility of conducting a portfolio compression exercise in order to reduce their counterparty credit risk and engage in such a portfolio compression exercise,[49] which corresponds to the requirement under § 23.503 that SDs and MSPs establish procedures for periodically engaging in compression exercises with their counterparties.
Under the EMIR standards, FCs and NFCs also must ensure that they are able to provide a reasonable and valid explanation to the relevant competent authority for concluding that a portfolio compression exercise is not appropriate.[50] This requirement corresponds directly to regulation 23.503 that SDs and MSPs engage in compression exercises with their counterparties “when appropriate,” which would necessarily require such registrants to demonstrate to the Commission why a compression opportunity was not appropriate.
Generally identical in intent to § 23.503, the EMIR portfolio compression standards are designed to reduce the operational risk, cost, and inefficiency of maintaining unnecessary transactions on the counterparties' books.
Commission Requirement: Section 4s(i) of the CEA[51] requires that each SD and MSP comply with the Commission's regulations prescribing timely and accurate confirmation of swaps.
Subject to an implementation period, § 23.501 requires confirmation of swap transactions (which includes execution, termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishing of rights or obligations of a swap) among SDs and MSPs by the end of the first business day following the day of execution.
Commission regulation 23.501 does not apply to swaps executed on a swap execution facility (“SEF”) or designated contract market (“DCM”) if the SEF/DCM provides for confirmation of swap transactions at the same time as execution. It also does not apply to swap transactions that are submitted for clearing by a derivatives clearing organization (“DCO”) within the time required for confirmation and the DCO provides confirmation at the same time the swap transaction is accepted for clearing.
Regulatory Objective: Timely and accurate confirmation of swaps—together with portfolio reconciliation and compression—are important post-trade processing mechanisms for reducing risks and improving operational efficiency. Through § 23.501, the Commission seeks to ensure that both parties to a trade are informed of and agree upon all terms of a swap transaction[52] in writing in a timely manner following execution, thereby promoting post-trade processing, netting, and valuation of the swap for risk management purposes. The correct calculation of cash flows, margin requirements, discharge of settlement obligations, and accurate measurement of counterparty credit exposure are all dependent on timely and accurate confirmation.[53]
OTC RTS Art. 12.4: FCs must establish the necessary procedure to report on a monthly basis to the relevant competent authority the number of unconfirmed OTC derivative transactions referred to in OTC RTS Art. 12.1—12.3 that have been outstanding for more than five business days.Start Printed Page 78886
Commission Determination: Pursuant to the EMIR standards specified above, and subject to a phase-in period, OTC derivative contracts entered into between FCs or NFCs+ must be confirmed as soon as possible and at the latest by the end of the next business day following the date of execution,[54] which corresponds to Commission regulation 23.501(a)(1) and (3)(i), requiring confirmation with other SDs, MSPs, and financial entities by the end of the first business day following the day of execution.
For OTC derivative contracts with all other NFCs, the EMIR standards require confirmation as soon as possible and, at the latest, by the end of the second business day following the date of execution.[55] This approach corresponds to the Commission regulation 23.501(a)(3)(ii), which requires written policies and procedures reasonably designed to ensure confirmation with non-SDs, non-MSPs, or non-financial entities by the end of the second business day following the day of execution.
Generally identical in intent to § 23.501, the EMIR trade confirmation requirements are designed to ensure that both parties to a trade are informed of, and agree upon, all terms of a swap transaction in writing in a timely manner following execution, thereby promoting post-trade processing, netting, and valuation of the swap for risk management purposes.
Commission Requirement: Section 4s(i) of the CEA requires each SD and MSP to conform to Commission standards for the timely and accurate confirmation, processing, netting, documentation, and valuation of swaps.[56] Pursuant to this requirement, the Commission adopted § 23.504.
MiFID requires counterparties to be classified as retail clients, professional clients,[57] and eligible counterparties,[58] and corresponding different conduct of business rules apply.[59] Investment firms have to correctly categorize clients and notify those clients of their classification; furthermore, investment firms should be able to demonstrate the correctness of the classification.
Firms have to conclude agreements with retail and professional clients setting out the respective rights and obligations and any other terms for the provision of the services.[60] Ex-ante information has to be provided to clients on the services provided, the risks, and the safeguarding of their assets.[61] Adequate ex-post reports also have to be provided.[62] Irrespective of the classification of clients, specific record-keeping obligations regulate the recording of client orders and transactions.[63]
With respect to dispute resolution, when concluding OTC derivative contracts with each other, FCs and NFCs must have agreed detailed procedures and processes in relation to: (a) the identification, recording, and monitoring of disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties, and (b) the resolution of disputes in a timely manner with a specific process for handling those disputes that are not resolved within five business days. Those procedures must at least record the length of time for which the dispute remains outstanding, the counterparty, and the amount which is disputed.[64]
Commission Determination: The EMIR standards specified above require OTC derivative contracts entered into between FCs or NFCs to be confirmed in Start Printed Page 78887writing,[65] which corresponds to the requirements of Commission regulation 23.504(b)(2).
Pursuant to EMIR Article 11, FCs and NFCs+ are required to value outstanding OTC derivatives contracts on a mark-to-market basis daily, or where market conditions determine otherwise, a “reliable and prudent marking to model” may be used.[66] This corresponds with Commission regulation 23.504(b)(4)(i), which requires SDs and MSPs to engage in daily valuation with other SDs and MSPs, and financial entities, but allows such procedures to be included in documentation with NFCs to the extent such counterparties request them.
Generally identical in intent to § 23.504(b)(2) and (4), the EMIR confirmation and valuation documentation requirements are designed to reduce the legal, operational, counterparty credit, and market risk that can arise from undocumented transactions or terms, reducing the risk of collateral and legal disputes, and exposure of counterparties to significant counterparty credit risk.
Based on the foregoing and the representations of the applicant, the Commission finds the confirmation and valuation documentation requirements of the EMIR standards specified above are comparable to and as comprehensive as the swap trading relationship documentation requirements of Commission regulations § 23.504(b)(2) and (4).
For the avoidance of doubt the Commission notes that the foregoing comparability determination only applies with regard to two provisions of § 23.504 (i.e., § 23.504(b)(2) and (4)). No comparability finding is made regarding the other provisions of § 23.504, namely § 23.504(a)(2) and (c)(2), that SDs and MSPs establish policies and procedures, approved in writing by senior management of the SD or MSP, reasonably designed to ensure that they have entered into swap trading relationship documentation with each counterparty prior to or contemporaneously with entering into a swap transaction with such counterparty.[67]
Moreover, the foregoing comparability determination does not extend to the requirement that such documentation include terms addressing payment obligations, netting of payments, events of default or other termination events, calculation and netting of obligations upon termination, transfer of rights and obligations, governing law, dispute resolution, and credit support arrangements, as well as notice of the status of the counterparty under the orderly liquidation procedures of Title II of the Dodd-Frank Act, and the effect of clearing on swaps executed bilaterally.[68] Nor does this determination relieve an SD or MSP from the documentation audit and recordkeeping requirements under § 23.504(c) and (d).
Regulatory Objective: Through § 23.202, the Commission seeks to ensure that an SD's or MSP's records include all information necessary to conduct a comprehensive and accurate trade reconstruction for each swap, which necessarily requires the records to be identifiable by transaction and Start Printed Page 78888counterparty. Complete and accurate trade reconstruction is critical for both regulatory oversight and investigations of illegal activity pursuant to the Commission's enforcement authority. The Commission believes that a comprehensive and accurate trade reconstruction requires records of pre-execution, execution, and post-execution trade information.
Commission Determination: The Commission finds that compliance with MiFID would enable the relevant competent authority to conduct a comprehensive and accurate trade reconstruction for each swap, which the Commission finds generally meets the regulatory objective of § 23.202. However, the request did not provide any basis on which the Commission could determine that MiFID or EMIR are comparable to and as comprehensive as § 23.202(a)(1) or regulation 23.202(b)(1), which require records of oral communications to be maintained for swap transactions and related cash and forward transactions, respectively, including telephone, voicemail, and mobile device recordings.[69]
Based on the foregoing and the representations of the applicant, the Commission hereby determines that the daily trading records requirements of MiFID are comparable to and as comprehensive as § 23.202, excepting § 23.202(a)(1) and (b)(1). This determination is limited to the content of the recordkeeping requirements of § 23.202 (excepting subsections (a)(1) and (b)(1)) and does not extend to the requirement that the Commission and any U.S. prudential regulator of an SD or MSP have direct access to such records.[70]
I respectfully dissent from the Commodity Futures Trading Commission's (“Commission”) approval of the Notices of Comparability Determinations for Certain Requirements under the laws of Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland (collectively, “Notices”). While I support the narrow comparability determinations that the Commission has made, moving forward, the Commission must collaborate with foreign regulators to harmonize our respective regimes consistent with the G-20 reforms.Start Printed Page 78889
Looking forward to next steps, the Commission must provide answers to Start Printed Page 78890several outstanding questions regarding these comparability determinations. In doing so, the Commission must collaborate with foreign regulators to increase global harmonization.
6. For purposes of this notice, the Business Conduct Requirements consist of 17 CFR 23.202, 23.501, 23.502, 23.503, and 23.504.
7. According to the most recent Financial Stability Board Progress Report, the EU is scheduled to have a clearing requirement by Q3 2014. That report also states that the EU is scheduled to begin authorizing CCPs in Q4 2013, issue its first clearing determinations in Q1 2014, and adopt central clearing Regulatory Technical Standards (RTS) in Q2 2014 (OTC Derivatives Working Group, “OTC Derivatives Market Reforms: Sixth Progress Report on Implementation,” Financial Stability Board, Sept. 2, 2013). Under EMIR, ESMA would determine which swaps would be subject to mandatory clearing according to provisions that are comparable to those set forth in Commission regulation 39.5(b). A clearing requirement would apply to financial entities, as well as to non-financial entities whose swap activity exceeds a certain threshold. ESMA's “Discussion Paper, The Clearing Obligation under EMIR” (July 2013) describes the standardized swaps that could be subject to a clearing requirement. Such swaps include the interest rate and credit default swaps covered by the Commission's clearing requirement (Commission regulation 50.4), other credit default swap indices, non-deliverable forwards that may be included in a Commission clearing requirement, and many other swaps including OTC equity index derivatives cleared only through European central counterparties, some of which are not Commission-registered derivatives clearing organizations.
8. Public Law 111-203, 124 Stat. 1376 (2016).
9. 7 U.S.C. 2(i).
10. The compliance dates are summarized on the Compliance Dates page of the Commission's Web site. (http://www.cftc.gov/​LawRegulation/​DoddFrankAct/​ComplianceDates/​index.htm.)
11. 78 FR 45342-45345.
12. See the Guidance, 78 FR 45342-44.
13. Under §§ 23.203 and 23.606, all records required by the CEA and the Commission's regulations to be maintained by a registered SD or MSP shall be maintained in accordance with Commission regulation 1.31 and shall be open for inspection by representatives of the Commission, the United States Department of Justice, or any applicable prudential regulator.
14. See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the CEA.
15. See e.g., §§ 23.203(b) and 23.606.
17. On July 11, 2013, the Commission staff issued a no-action letter related to EU rules on risk mitigation. See No-Action Relief for Registered Swap Dealers and Major Swap Participants from Certain Requirements under Subpart I of Part 23 of Commission Regulations in Connection with Uncleared Swaps Subject to Risk Mitigation Techniques under EMIR, CFTC Letter No. 13-45 (July, 11, 2013) (“Risk Mitigation Letter”). The Commission staff found that the Commission and the EU have essentially identical rules in important areas of risk mitigation for the largest counterparty swap market participants. Specifically, the Commission staff determined that under EMIR, the EU has adopted risk mitigation rules that are essentially identical to certain provisions of the Commission's business conduct standards for SDs and MSPs. In areas such as confirmation, portfolio reconciliation, portfolio compression, valuation, and dispute resolution, the Commission staff found that the respective regimes are essentially identical. The Commission staff determined that where a swap/OTC derivative is subject to concurrent jurisdiction under US and EU risk mitigation rules, compliance under EMIR will achieve compliance with the relevant Commission rules because they are essentially identical. The Commission's analysis of the subject submission is informed by the staff's finding in connection with the Risk Mitigation Letter but the Commission notes that the standards applied in that context are distinguishable from the “comparable and comprehensive” standards applied in the instant comparability determination.
18. EMIR: Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories. http://eur-lex.europa.eu/​LexUriServ/​LexUriServ.do?​uri=​OJ:L:2012:201:0001:0059:EN:PDF
19. See EMIR Article 10 and RTS Article 10.
20. Directive 2004/39/EC and the relevant implementing measures (Directive 2006/73/EC and Regulation 1287/2006). http://eur-lex.europa.eu/​LexUriServ/​LexUriServ.do?​uri=​CELEX:32004L0039:EN:NOT
21. See the Web site of the European Commission for confirmation of the transposition of MiFID into the national law of each member state, available here: http://ec.europa.eu/​internal_​market/​securities/​docs/​transposition/​table_​en.pdf. Note that the issue of partial implementation in the Netherlands was resolved in 2008, http://ec.europa.eu/​eu_​law/​eulaw/​decisions/​dec_​08_​05_​06.htm. The Commission notes that the EC has certified to the Commission that each member state in which a registered SD or MSP is organized has completed the transposition process (e.g., Ireland, UK, France, Spain, and Germany).
22. Because the applicant's request and the Commission's determinations herein are based on the comparability of EU requirements applicable to entities subject to EMIR and MiFID, an SD or MSP that is not subject to the requirements of EMIR or MiFID upon which the Commission bases its determinations, may not be able to rely on the Commission's comparability determinations herein. The applicant has noted for the Commission that the concept of an MSP is not explicitly mirrored in EU legislation and so it cannot be confirmed that MSPs would always be covered by EMIR and MiFID. However, the applicant states that the definition of an “investment firm” under MiFID is considerably wider than that of an SD, and thus MSP's should, in most cases, be caught within the definition of “investment firm.”
23. The applicant provided information regarding MiFID II and the Markets in Financial Instruments Regulation (“MiFIR”), http://ec.europa.eu/​internal_​market/​securities/​isd/​mifid/​index_​en.htm, stating that these two proposals are part of the legislative package for the review of MiFID, and that the legislative process may be concluded with the adoption of the final political agreement by the end of 2013. The applicant further stated that an additional 18 to 24 months will be needed to adopt implementing measures, with the overall package to be applied by the end of 2015.
27. 78 FR 45343. The Commission's substituted compliance program would generally be available for swap data repository reporting (“SDR Reporting”), as outlined in the Guidance, only if the Commission has direct access to all of the data elements that are reported to a foreign trade repository pursuant to the substituted compliance program. Thus, direct access to swap data is a threshold matter to be addressed in a comparability evaluation for SDR Reporting. Moreover, the Commission explains in the Guidance that, due to its technical nature, a comparability evaluation for SDR Reporting “will generally entail a detailed comparison and technical analysis.” A more particularized analysis will generally be necessary to determine whether data stored in a foreign trade repository provides for effective Commission use, in furtherance of the regulatory purposes of the Dodd-Frank Act. See 78 FR 45345.
38. Section 4s(j)(3) and (4) of the CEA and Commission regulation 23.606 require a registered SD or MSP to make all records required to be maintained in accordance with Commission regulation 1.31 available promptly upon request to, among others, representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR 23.203. In the Guidance, the Commission states that it “reserves this right to access records held by registered [SDs] and MSPs, including those that are non-U.S. persons who may comply with the Dodd-Frank recordkeeping requirement through substituted compliance.” 78 FR 45345 n. 472; see also id. at 45342 n. 461 (affirming the Commission's authority under the CEA and its regulations to access books and records held by registered SDs and MSPs as “a fundamental regulatory tool necessary to properly monitor and examine each registrant's compliance with the CEA and the regulations adopted pursuant thereto”).
40. 7 U.S.C. 6s(i).
41. The term “portfolio reconciliation” is defined in § 23.500(i) as any process by which the two parties to one or more swaps: (1) exchange the terms of all swaps in the swap portfolio between the counterparties; (2) exchange each counterparty's valuation of each swap in the swap portfolio between the counterparties as of the close of business on the immediately preceding business day; and (3) resolve any discrepancy in material terms and valuations.
42. See Article 13 of the EMIR Regulatory Technical Standards. In addition, Article 13(2) permits the reconciliation to be performed by a third-party, which corresponds to Commission regulation 23.502(a)(2) and (b)(2).
43. See Article 13(2) of the EMIR Regulatory Technical Standards.
44. See Article 13(3)(a) of the EMIR Regulatory Technical Standards.
45. See Article 13(3)(b) of the EMIR Regulatory Technical Standards.
46. See Article 15(2) of the EMIR Regulatory Technical Standards.
47. For example, the reduced transaction count may decrease operational risk as there are fewer trades to maintain, process, and settle.
48. See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904, 55932 (Sept. 11, 2012).
49. See Article 14 of the EMIR Regulatory Technical Standards.
51. 7 U.S.C. 6s(i).
52. Pursuant to § 23.500(l), “swap transaction” is defined to mean “any event that results in a new swap or in a change to the terms of a swap, including execution, termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishing of rights or obligations of a swap.”
53. See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 12 CFR Part 23, 77 FR 55904 at 55917 (September 11, 2012) (Final Rule).
54. See Article 12 of the EMIR Regulatory Technical Standards.
56. See 7 U.S.C. 6s(i).
57. Annex II of MiFID.
58. Article 24 MiFID.
59. Article 19 MiFID and 28 to 34 of MiFID L2D.
60. Article 19 (7) MiFID.
61. Article 19 (3) MiFID and Articles 29-33 MiFID L2D.
62. Article 19 (8) MiFID and Articles 40-43 of MiFID L2D.
63. Article 51 MiFID L2D and Articles 7-8 and Annex I, table I of MiFID L2R.
64. EMIR Art. 11 and OTC RTS Art 15.
65. See Article 12 of the EMIR Regulatory Technical Standards.
66. See Article 11(2) of EMIR. See also Article 16 of the EMIR Regulatory Technical Standards (describing the market conditions that prevent marking-to-market) and Article 17 of the EMIR Regulatory Technical Standards (describing the criteria for using marking-to-model).
67. See Commission regulation 23.504(a)(2), 17 CFR 23.504(c)(2).
68. See § 23.504(b)(1), (3), (5), and (6).
69. In the EU's request for a comparability determination proposed regulations concerning the recording of oral communications were submitted. These requirements are currently under negotiation. The Commission may reconsider the EU's request when and if the proposal is enacted.
70. Unless the records required by MiFID are available to the Commission and any U.S. prudential regulator under the foreign legal regime, it would be impossible to meet the regulatory objective of § 23.202. As stated in the Guidance, the ability to rely on a substituted compliance regime is dependent on direct access to the books and records of a registrant. This is the case with respect to any Transaction-Level Requirement, and not only the daily trading records required by § 23.202. See 78 FR 45344-45.