March saw a flurry of regulatory announcements in the OTC derivatives world. Here is a recap of what has been going on:
US / European Regulators Take Major Steps Toward Regulatory Convergence
On March 15, the European Commission (EC) determined that the USA Commodity Futures Trading Commission (CFTC) has equivalent requirements as the EU for regulating central counterparties (CCPs). CCPs registered with the CFTC will be able to obtain recognition in the EU and thus more easily provide services to EU companies. Market participants can use them to clear standardised OTC derivatives trades as required by EU legislation, but remain subject solely to the regulation and supervision of their home jurisdiction. Because CCPs that have been recognised under the EMIR process will also obtain qualifying CCP (QCCP) status across the European Union under the Capital Requirements Regulation (CRR), EU banks' exposures to these CCPs will be subject to a lower risk weight in calculating their regulatory capital.
Meanwhile on March 16, the CFTC approved a substituted compliance framework for dually-registered CCPs located in the EU, along with a comparability determination with respect to certain EU rules. The Determination permits 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. The rulings on both sides of the Atlantic are aimed at ensuring CCPs are held to comparably high standards while reducing the potential for regulatory arbitrage.
ESA's Finalise Initial Margin Requirements for Non-Centrally Cleared OTC Trades
On March 9, the Joint Committee of the European Supervisory Authorities (ESA)—EBA, EIOPA, ESMA—published the final draft of Regulatory Technical Standards, covering mitigation techniques related to the exchange of collateral for non-centrally cleared OTC derivatives trades. For non-centrally cleared trades, counterparties will have to exchange both initial and variation margins in order to reduce counterparty risk, mitigate potential systemic risk and ensure alignment with international standards. The draft lists eligible collateral, as well as criteria to ensure it is sufficiently diversified and not subject to wrong-way risk, and methods to determine collateral haircuts. It also lays down operational procedures related to documentation, legal assessments of the enforceability of the agreements and timing of collateral exchange, and covers the procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.
ESMA Consults on Securities Financing Transaction Reporting
On March 11, ESMA issued a discussion paper on the rules under the Securities Financing Transaction Regulation (SFTR), published in December 2015. The DP sets out proposals for implementing the reporting framework under the SFTR, including tables of the fields with the proposed data to be reported, and the registration requirements for those Trade Repositories (TRs) that want to accept reports on security financing transactions. ESMA is seeking feedback from all stakeholders, in particular from entities active in the repo, securities lending/borrowing and commodities lending/borrowing markets before 22 April 2016. Responses will be used to develop detailed rules on which ESMA will publish a follow-up consultation in the second half of 2016. The final draft rules will be sent for approval to the European Commission by 13 January 2017.
See all regulatory news via the DerivSource Regulation Timeline: