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REGULATION OF
DERIVATIVES:
EU AND US PERSPECTIVES
Vlad Maly
Peter Malyshev
15 February 2013
Introduction Page: 3
Comparative Analysis Page: 8
Conclusion Page: 59
Disclaimer
Although this presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. This presentation is not created nor
designed to address the unique facts or circumstances that may arise in any specific instance. You should not, nor are you authorised to, rely on this content as a source of legal advice.
This material does not create any attorney-client relationship between you and Latham & Watkins.
1. INTRODUCTION
REASONS BEHIND INCONSISTENT / DUPLICATIVE RULES
4
SD
MSP End-
User
Non
FC
NFC+ NFC
■ Different approach towards classification of market participants in the US
and EU
■ CFTC rules enacted pursuant to the Dodd-Frank Act (DFA) require
registration by swap dealers (SDs) and major swap participants (MSPs)
and apply majority of the rules to SDs and MSPs, with non-SDs and
MSPs having lesser (albeit substantial) compliance obligations
■ Number of obligations set out in EMIR apply to all market participants;
NFC+s only required to notify ESMA as opposed to having to register
Different approach towards scope of regulation in the US and EU
■ US regulations under the DFA apply to swaps (and options,
which are also considered swaps)
■ DFA does not apply to spot transactions and forwards (unless
these are rolling and have built-in optionality)
■ EU rules under EMIR apply to “derivatives” (includes futures and
forwards)
■ US regulations allow only entities and persons that qualify as
eligible contract participants (ECPs) to enter into OTC swaps or
swaps traded on a swap execution facility (but anyone can trade
swaps and futures on an exchange)
■ EMIR does not impose any limitation on who can enter into a
“derivative”
REASONS BEHIND INCONSISTENT / DUPLICATIVE RULES
5
6
Dodd-Frank §722(d) gives CFTC authority over any non-U.S. activities
that have:
■ “…a direct and significant connection with activities in, or effect on,
commerce of the United States.”
■ applies to all entities (US/non-US) – focus on their activities (cross-
border activities)
EXTRATERRITORIALITY – FRAMEWORK – DODD-FRANK
EXTRATERRITORIALITY – FRAMEWORK - EMIR
7
■ “…a direct, substantial and foreseeable effect within the Union”
■ focus on OTC derivative contracts
EMIR Article 4.1(a) applies clearing
obligation to OTC derivative contracts
entered into between an EU entity and
an entity “established in a third country
that would be subject to the clearing
obligation if it were established in the
Union” or between two entities
established in third countries that would
be subject to the clearing obligation if
they were established in the Union,
provided that the contract has:
EMIR Article 11.12 applies obligations
set out in Article 11 (Risk-mitigation
techniques) to OTC derivative contracts
entered into between third country
entities that would be subject to those
obligations if they were established in
the Union, provided that those contracts
have:
2. COMPARATIVE ANALYSIS
(A) MARKET PARTICIPANTS
SD / MSP REGISTRATION
10
■ If you fall within the definition of an SD or MSP and are above the SD de
minimis threshold or applicable MSP tests:
You are required to register as an SD/MSP (as applicable); and
Are subject to the requirements of Title VII under the DFA
SWAP DEALER REGISTRATION DE MINIMIS THRESHOLD
11
Counterparty
Type
Current De Minimis
Threshold
Potential Future
Threshold*
Non-Special
Entities
$8 billion $3 billion
Special Entities $25 million $25 million
*The CFTC must conduct a study to determine if the lower thresholds are
appropriate
■Definition – A person that holds itself out as a dealer in swaps, makes market in
swaps, regularly enters into swaps as an ordinary course of business for its own
account, or is known in the trade as a dealer or market maker in swaps.
■De minimis threshold – Registration not required unless dealing activity calculated
over a rolling period of 12 months exceeds a de minimis amount (includes
aggregation of affiliate positions). If threshold is breached, registration is required
within 2 months.
MAJOR SWAP PARTICIPANT TESTS - GENERALLY
12
An entity may be an MSP if it has a significant amount of swaps activity (in some cases
even including hedging activity) even if it does not engage in dealing.
A person is an MSP if it exceeds the thresholds from any of the following tests:
Substantial Position Test:
Note - Positions held for hedging purposes are excluded.
Substantial Counterparty Exposure Test:
Note – There is no credit for hedging positions.
The Financial Entity Test: A person qualifies as an MSP if it is a "financial entity" that is "highly
leveraged“, is not subject to capital requirements established by an appropriate federal banking agency
and maintains a “substantial position” in a major category of swaps.
Substantial position is defined the same as above.
“Highly leveraged” is defined as a ratio of total liabilities to equity greater than 12:1, as measured
at the close of business on the last business day of the fiscal quarter.
Note – There is no credit for hedging positions.
Current Uncollateralized
Exposure
Current Uncollateralized Exposure +
Potential Future Exposure
Rate Swaps $3 billion $6 billion
Credit, Equity or
Commodity Swaps
$1 billion $2 billion
Current Uncollateralized
Exposure
Current Uncollateralized Exposure +
Potential Future Exposure
All swaps combined $5 billion $8 billion
END-USER EXCEPTION FROM MANDATORY CLEARING
13
■ Exception from clearing and trading of swaps that the CFTC determines to
be subject to the mandatory clearing and mandatory trading requirement.
■ To qualify as “end-user”, an entity must:
Be a non-financial entity (e.g., SD/MSP/commodity pools do not qualify)
Be using swaps to hedge or mitigate commercial risk; and
Notify an SDR or the CFTC how it generally meet its financial obligations.
■ The notification requirement starts at the time when clearing obligation
begins for non-financial entities – 9 September 2013 (thereafter, information
must be submitted on an annual basis).
NFC+ NOTIFICATION
14
■ Will apply from the date when RTS become effective (March 2013)
EU NFCs (and arguably also Non-EU NFCs) to immediately notify ESMA when they exceed the clearing threshold (measured on a group basis – includes Non-EU NFCs that are part of the group)
IFRS hedging - excluded proxy hedging (closely correlated instrument) - excluded macro and portfolio hedging – excluded offsetting contract entered into to close out existing contracts that ceased
to be hedging - excluded
Clearing thresholds (gross notional):
• credit derivatives: EUR 1bn
• equity derivatives: EUR 1bn
• interest rate derivatives: EUR 3bn
• FX derivatives: EUR 3bn
• commodity + other derivatives: EUR 3bn
Excludes derivatives
objectively measurable as
reducing risks directly relating
to the commercial activity or
treasury financing activity
of the group
(B) CROSS-BORDER APPLICATION
OF THE REGULATIONS
ANALYSIS OF CROSS BORDER ISSUES - CFTC
16
■ Critical questions to ask to determine application of CFTC’s rules:
What are the categories of participants involved?
Is a “US Person” or a “non-US Person” involved?
Is registration necessary and are there aggregation issues?
What rules apply: entity or transactional level or substituted
compliance?
What is the timing of compliance and applicable deadlines?
CATEGORIES OF PARTICIPANTS
17
US person (unregistered)
US SD / MSP
Foreign branch of US person (unregistered)
Foreign branch of US SD / MSP
Non-US subsidiary or affiliate of US person (unregistered)
Non-US subsidiary or affiliate of US SD / MSP
Guaranteed non-US subsidiary or affiliate of US person (unregistered)
Guaranteed non-US subsidiary or affiliate of US SD / MSP
Non-US person (unregistered)
Non-US SD / MSP
Non-US SD / MSP with US SD / MSP affiliation
Non-US SD / MSP without a US SD / MSP affiliate
US person located overseas
US central booking entity
Non-US central booking entity
CFTC’S VIEW OF REGULATION (SUMMARY)
18
Some DFA Rules Apply
• US Person – non-US
Person
• Non-US Person -
Foreign branch of US
Person
• Foreign branch of US
SD/MSP - Foreign
branch of US SD/MSP
• Non-US SD/MSP with
US SD/MSP affiliation –
Non-US Person
No DFA Rules Apply
• Non-US Person – Non-
US Person (both
unregistered)
• Non-US SD/MSP
without US SD/MSP
affiliation – Non-US
Person
All DFA Rules Apply
• US Person – US
Person
• US Person – Foreign
branch of US SD/MSP
DETAILED RULES: CFTC
19
Proposed ET Guidance: CFTC proposed extraterritoriality interpretation
(07-12-2012);
Proposed ET Exemptive Order: CFTC proposed exemptive order for
cross-border transactions (07-12-2012);
ET No-Action Letter: CFTC no-action letter providing an extension for
compliance for certain persons outside of the US (10-12-2012);
Joint Press Statement of Leaders on Operating Principles and Areas of
Exploration in the Regulation of the Cross-border OTC Derivatives Market
(Dec. 4, 2012);
Final Order: CFTC final exemptive order (12-21-2012);
Additional Proposed Guidance: Further proposed guidance (12-21-2012).
CFTC FINAL ORDER
20
■ Includes a revised, temporary definition of “U.S. person” (in addition to the
definition in the ET No-Action Letter) to be used pending adoption of a final
definition in the final cross-border guidance.
■ Temporary guidance as to which swaps must be included in the calculation
that non-U.S. persons must make in order to determine whether they must
register as SDs or MSPs.
■ Relief for foreign branches of U.S. persons from compliance with certain
requirements to the extent not required under the law of the local jurisdiction
of such foreign branch.
■ Relief for non-U.S. SDs or MSPs from compliance with certain requirements
to the extent not required under the law of the local jurisdiction of such
person.
DEFINING A “U.S. PERSON”
21
New temporary definition in the Final Order: (i) A natural person who is a resident of the United States;
(ii) A corporation, partnership, limited liability company, business or other trust, association,
joint-stock company, fund or any form of enterprise similar to any of the foregoing, in each case that is (A) organized or incorporated under the laws of a state or other jurisdiction in the United States or (B) effective as of 1 April 2013 for all such entities (other than funds or collective investment vehicles) having its principal place of business in the United States;
(iii) A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is primarily for foreign employees of such entity;
(iv) An estate of a decedent who was a resident of the United States at the time of death, or a trust governed by the laws of a state or other jurisdiction in the United States if a court within the United States is able to exercise primary supervision over the administration of the trust;
(v) An individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in (i) through (iv) above; or
(vi) A foreign branch of a person described in (i) through (v) above.
DEFINING A “U.S. PERSON” (CONT.)
22
The Final Order definition is narrower than the Proposed ET Guidance
definition:
■It does not include:
Corporate entities in which the direct or indirect owners are US person(s)
who are responsible for the liabilities of such corporate entity;
Commodity pools or collective investment vehicles with a majority of US
investors; or
Commodity pools or collective investment vehicles where the operator
would be required to register as a commodity pool operator.
The Final Order definition is broader than the ET No-Action Letter definition:
■It adds entities with their principal place of business in the US (although this
will not apply until April 1, 2013 and will never apply to collective investment
vehicles and funds).
Reliance on representations permitted:
■Parties can “reasonably rely” on the representations of their counterparties
as to their status.
■“Absent indications to the contrary,” representations would satisfy due
diligence requirements.
■Parties cannot ignore the “red flags”!
U.S. PERSON – DUE DILIGENCE
23
Collective investment vehicles are not specifically identified in the Final Order
definition.
■Funds with majority US ownership and funds operated by a person required
to register as a CPO were included in the Proposed ET Guidance definition.
Principal place of business (“PPB”) prong:
■Although corporate entities with a principal place of business in the US will
be considered US persons after April 1, 2013, this will not apply to funds
even after that date.
Additional Proposed Guidance:
■CFTC has proposed to include in the US person definition any fund directly
or indirectly majority-owned by US persons, except for any such pool or fund
that is publicly traded but not offered to US persons.
U.S. PERSON - FUNDS
24
U.S. PERSON - BRANCHES
25
Foreign branches of US persons are considered US persons.
■Not true for subsidiaries or affiliates.
Final Order treatment of branches:
■If a foreign branch exceeds the thresholds applicable to SDs or MSPs, its principal would be required to register and that registration would cover the foreign branch as well.
The Final Order treats foreign branches differently from other US persons:
■Non-US persons need not include swaps with foreign branches in their SD de minimis or MSP calculations (even though these branches are US persons!).
■Foreign branches of US persons transacting with non-US persons need only comply with transaction-level requirements imposed by local regulator.
■Two foreign branches of US SDs or US MSPs transacting with each other need only comply with transaction-level requirements imposed by local regulator.
U.S. PERSON – SD DE MINIMIS REGISTRATION CALCULATION
26
■ In General: US persons must count all of their swap dealing activity
(irrespective of the counterparty) in determining whether their swaps activity
exceeds the de minimis threshold for registration as an SD.
■ Affiliate Aggregation: US persons must count all swap dealing activities of
their affiliates that are under common control (irrespective of the
counterparty).
Exception: US banks that are wholly owned by a non-US, SD-registered
bank may not need to count the swap dealing activities of their foreign
affiliates or the US branches of those affiliates (several conditions apply).
REGISTRATION – NON-US PERSONS
27
In General: Non-US persons must count all of their US-facing swap
dealing activity in their de minimis calculation.
■Exception: Do not need to count swaps with non-US branches of US SDs (or
a non-US branch of US persons that intend to register as an SD by March
31, 2013).
Affiliate Aggregation: Non-US persons must count all US-facing swap
dealing activities of their non-US affiliates that are under common
control.
■Exception: Non-US persons with registered SD affiliates do not need to
count swap dealing activity of non-US affiliates if:
The non-US affiliate is a registered SD; OR
The non-US affiliate was engaged in swap dealing activity with US persons as of 21
December 2012.
Illustrates
swaps that
count for “Non-
US Entity”
Foreign
branch of
US SDs
AFFILIATE AGGREGATION – NON-US PERSONS
28
Non-US
Entity
US Persons
(US located)
Non-US
Person
s
Swaps
facing
Non-US
Affiliate (not
an SD)
Swaps
facing
*Not counted if non-US
affiliate was engaged in
US-facing dealing as of
12/21/12
Non-US
Affiliate
(Registered
SD)
Non-US
Persons
US
Person
s
Swaps
facing
Red X’s indicate
affiliate activity
that need not be
counted
US
Person
s
Non-US
Persons
US Affiliate
Swaps
facing US
Person
Non-US
Person
s
Alternative treatment of affiliates in Additional Proposed Guidance:
■Non-US persons must include swap dealing activities of affiliates (US and
non-US) under common control, but
■Need not include swap dealing activities of any non-US affiliate under
common control that is registered as an SD, and
■Need not include swap dealing activities of non-US affiliates when the
counterparty is a non-US person.
Central booking entities:
■Non-US persons need not include swaps to which they are not a party
because the swap is entered into by an affiliated central booking entity.
AFFILIATE AGGREGATION
29
APPLICABLE RULES
Entity-level requirements: Capital requirements;
Chief compliance officer;
Risk management ;
Internal business conduct;
Swap data recordkeeping;
SDR reporting; and
Large trader reporting
Transaction-level requirements: Category A: Risk Mitigation and
Transparency
Clearing and swap processing;
Margin and segregation for
uncleared swaps;
Trade execution;
Swap trading relationship
documentation;
Portfolio reconciliation and
compression;
Real time reporting;
Trade confirmation; and
Daily trading records
Category B: Sales Practices
External business conduct
30
[Note that Category B is an irrelevant distinction for purposes of Final Order]
U.S. PERSON COMPLIANCE REQUIREMENTS
31
U.S. person (other than a foreign
branch of a U.S. SD/MSP)
[E.g., a U.S. corporate entity that
is not registered with the CFTC]
U.S. person
Non- U.S. person
U.S. PERSON COMPLIANCE REQUIREMENTS
32
Entity A Counterparty
Type
Included in Entity A’s De
Minimis and/or MSP
Calculations?
Entity and Transaction Level
Requirements apply to Entity
A?
U.S. person (other
than a foreign
branch of a U.S.
SD/MSP)
[E.g., a U.S.
corporate entity
that is not
registered with the
CFTC]
U.S. person Yes Yes, but non-SD/MSPs have
limited compliance obligations
Non-U.S. person Yes
Yes, but non-SD/MSPs have
limited compliance obligations
FOREIGN BRANCH OF U.S. SD/MSP
33
Foreign branch of U.S. SD/MSP
[E.g., a London branch of a U.S.
registered SD located in New York]
U.S. person
Non- U.S. person
Foreign branch of U.S.
SD/MSP
Branch
FOREIGN BRANCH OF U.S. SD/MSP
34
Entity A Counterparty Type Included in Entity A’s De
Minimis and/or MSP
Calculations?
Entity and Transaction
Level Requirements apply
to Entity A?
Foreign branch of
U.S. SD/MSP
[E.g., a London
branch of a U.S.
registered SD
located in New
York]
U.S. person
Yes, but Entity A is not treated as
being separate from the U.S.
principal for registration purposes
Yes
Foreign branch of U.S.
SD/MSP
The foreign branch may
comply with transactional
requirements only as may
be required by the jurisdiction
where such branch is located
Non-U.S. person
NON-U.S. PERSON NOT REGISTERED AS AN SD/MSP
35
Non-U.S. person not registered as an
SD/MSP
or
[E.g. (i) a bank located in Paris that is
below the SD de minimis threshold and
applicable MSP thresholds or (ii) a non-
U.S. subsidiary of a U.S. entity that is
not an SD or MSP]
U.S. person
Non- U.S. person
Foreign branch of U.S.
SD/MSP
Subsidiary
NON-U.S. PERSON NOT REGISTERED AS AN SD/MSP
36
Entity A Counterparty
Type
Included in Entity A’s De
Minimis and/or MSP
Calculations?
Entity and Transaction
Level Requirements apply
to Entity A?
Non-U.S. person not
registered as an SD/MSP
[E.g. (i) a bank located
in Paris that is below
the SD de minimis
threshold and
applicable MSP
thresholds or (ii) a non-
U.S. subsidiary of a U.S.
entity that is not an SD
or MSP]
U.S. person
Yes (unless the swap is entered
into by an affiliated central
booking entity), but note that
certain exemptions from the
requirement to aggregate swap
dealing activity of affiliates may
apply
No, but Entity A may be
indirectly affected by
compliance obligations
applicable to the U.S.
counterparty
Foreign branch of
U.S. person
No, as long as principal is
registered as an SD or
represents that it intends to
register as an SD by 31 March
2013
No
Non-U.S. person
No
NON-U.S. SD/MSP (PART OF A GROUP WITH U.S. SD/MSP)
37
Non-U.S. SD/MSP that is part of an affiliated
group where the ultimate parent is a U.S.
SD/MSP
[E.g. a non-U.S. subsidiary of a U.S. entity
that is headquartered in NY and is an SD]
U.S. person
Non- U.S. person
Subsidiary of
affiliate
Ultimate Parent
NON-U.S. SD/MSP (PART OF A GROUP WITH U.S. SD/MSP)
38
Entity A Counterparty
Type
Included in Entity A’s De
Minimis and/or MSP
Calculations?
Entity and Transaction
Level Requirements apply
to Entity A?
Non-U.S. SD/MSP that is
part of an affiliated group
where the ultimate parent
is a U.S. SD/MSP
[E.g. a non-U.S.
subsidiary of a U.S.
entity that is
headquartered in NY
and is an SD]
U.S. person
Yes (unless the swap is entered
into by an affiliated central
booking entity)
Entity-Level Requirements: Entity A may
delay compliance until 12 July 2013,
except SDR reporting and LTR
requirements apply on their respective
compliance dates
Transaction-Level Requirements:
Apply
Non-U.S. person
No
Entity-Level Requirements: Entity A may
delay compliance until 12 July 2013,
except SDR reporting and LTR
requirements apply on their respective
compliance dates
Transaction-Level Requirements:
Entity A may comply with only those
requirements imposed by Entity A’s local
jurisdiction.
NON-U.S. SD/MSP (NOT PART OF A GROUP WITH U.S. SD/MSP)
39
Non-U.S. SD/MSP that is not part of an
affiliated group where the ultimate parent is
a U.S. SD/MSP
[E.g. a non-U.S. entity located in Paris,
with an ultimate parent headquartered in
Frankfurt, with enough U.S.-facing swaps
to require it to register as an SD in the
U.S.]
U.S. person
Non- U.S. person
Subsidiary/Branch
Ultimate Parent
NON-U.S. SD/MSP (NOT PART OF A GROUP WITH U.S. SD/MSP)
40
Entity A Counterparty
Type
Included in Entity A’s De
Minimis and/or MSP
Calculations?
Entity and Transaction
Level Requirements apply
to Entity A?
Non-U.S. SD/MSP that is
not part of an affiliated
group where the ultimate
parent is a U.S. SD/MSP
[E.g. a non-U.S. entity
located in Paris,
headquartered in
Frankfurt, with enough
U.S.-facing swaps to
require it to register as
an SD in the U.S.]
U.S. person
Yes (unless the swap is entered
into by an affiliated central
booking entity)
Entity-Level Requirements: Entity A may
delay compliance until 12 July 2013,
except SDR reporting and LTR
requirements apply on their respective
compliance dates.
Transaction-Level Requirements:
Apply.
Non-U.S. person
No
Entity-Level Requirements:
Entity A may delay compliance with all
requirements until 12 July 2013
Transaction-Level Requirements:
Entity A may comply with only those
requirements imposed by Entity A’s local
jurisdiction.
DETAILED RULES: ESMA
41
Pursuant to Article 11.14 of EMIR ESMA shall draft regulatory technical
standards specifying
“…the contracts that are considered to have a direct, substantial and
foreseeable effect within the Union…”
….and submit those by 30 September 2012.
WHO IS CURRENTLY WITHIN SCOPE? – “EU PERSON”
42
■ Financial counterparties (FCs) (prudentially regulated (PRFCs) and not
prudentially regulated (NPRFCs))
investment firms, credit institutions, insurance/assurance/reinsurance undertakings,
UCITS and alternative investment funds in each case authorised in accordance with the
relevant European Directive
■ Non-financial counterparties (NFCs)
any undertaking (other than any FC) established in the Union
■ Non-financial counterparties above the clearing threshold (“NFC+”)
(C) SUBSTITUTIVE COMPLIANCE
SUBSTITUTIVE COMPLIANCE - EU
44
■ with obligations contained in Articles 4, 9, 10 and 11 where at least one of the counterparties is established in a third country with respect to which the Commission has adopted an implementing act declaring that its legal, supervisory and enforcement arrangement is equivalent to the requirements laid down in Articles 4,9, 10 and 11
■ Article 4 - clearing obligation
■ Article 9 – reporting obligation
■ Article 10 – NFCs that exceed the clearing threshold
■ Article 11 – risk-mitigation techniques
timely confirmation (FCs/NFCs/NFC+s) reconciliations (FCs/NFCs/NFC+s) dispute resolution (FCs/NFCs/NFC+s) mark-to-market (FCs/NFC+s) risk-management procedures (exchange of collateral) (FCs/NFC+s) capital requirements (FCs)
ESMA EQUIVALENCE ADVICE
45
US; Japan – Phase I (by 15 March 2013)
Australia, Canada, Dubai, HK, India, Singapore,
Switzerland – Phase II (by 15 June 2013)
G-20 WHO’S INVOLVED?
46
“ all standardized OTC derivatives contracts should… … be cleared
through central counterparties by end-2012 at the latest.”
G-20 (Pittsburgh, September 2009)
ESMA EQUIVALENCE ADVICE
47
■ US; Japan – Phase I (by 15 March 2013)
■ Australia, Canada, Dubai, HK, India, Singapore, Switzerland – Phase II (by
15 June 2013)
CCPs TRs Clearing,
reporting
Risk
mitigation
US 1 1 1 1
Japan 1 1 1
Australia 2 2 2
Canada 2 2
Dubai 2
Hong Kong 2 2 2 2
India 2
Singapore 2
Switzerland 2 2 2
(D) REPORTING, CLEARING AND OTHER
RISK MITIGATION OBLIGATIONS
REPORTING - EMIR
49
■ T+1 reporting of cleared/non-cleared; exchange traded and OTC derivative transactions; reporting of amendments; daily reporting of mark to market and posted collateral (can be on a portfolio basis) (FCs & NFC+s); intragroup transaction also reported; only applies to EU entities
■ Backloading: Trades outstanding on 16 August 2012 and still outstanding on the reporting
start date have to be reported within 90 days of the reporting start date Trades outstanding on 16 August 2012 or entered into thereafter but not
outstanding on the reporting start date have to be reported within 3 years of the reporting start date
Credit and interest rate
derivatives
– commencing 1 July
2013 (or if no TR by 1 April
2013, 90 days within
registration of the TR)
Other derivatives –
commencing 1 January
2014 (or if no TR by 1
October 2013, 90 days
within registration of the
TR)
REPORTING – CFTC RULES
50
These rules are effective now
■ Part 43 - Real-time reporting &
■ Part 45 - Regulatory reporting
> CDS/IRS – SDs by deadline to register (31 December 2012)
> Equities/FX/Other – SDs by 28 February 2013
> All – MSPs by deadline to register (28 February 2013)
> All – Financial Entities and others (10 April 2013)
■ Part 46 – Historical reporting
> CDS/IRS - SDs (first 30 January 2013)
> Equities/FX/Other – SDs (first 30 March 2013)
> All – MSPs by deadline to register (28 February 2013)
> All – Financial entities and others (10 April 2013)
US/EU REPORTING TIMELINE
51
31 Dec
‘12
1 March
‘13 10 April
‘13
30 March
‘13
Real-time (Part
43) and regulatory
reporting (Part 45)
for CDS/IRS
Historical Reporting
(Part 46) for
CDS/IRS
General compliance
deadline for all reporting
requirements applicable to
non SDs/MSPs
Large swap trader reporting
for SD non-Clearing members
Historical
Reporting (Part
46) for
Equities/FX/Other
30 Jan ‘13 28 Feb
‘13
Real-time (Part
43) and regulatory
reporting (Part 45)
for
Equities/FX/Other
1 July
‘13
Reporting to TRs on
a T+1 basis of
CDS/IRS
Reporting to TRs on
a T+1 basis of all
derivatives
1 Jan
‘14
Deadline for backloading of
outstanding transactions
1 Oct
‘13
US: IS “SUBSTITUTED COMPLIANCE” AVAILABLE?
52
■ Non-U.S. SD/MSP may be permitted to comply with home country
requirements in lieu of CFTC regulations when facing non-US persons but
still needs to register in the US.
■ CFTC will evaluate whether home country requirements are “comparable
and comprehensive” to CFTC requirements.
CFTC proposes to make comparability determinations on an individual
requirement basis;
Applications for substituted compliance can be made on behalf of an
individual SD/MSP or a group from the same jurisdiction or a regulator;
CFTC may conduct an on-site exam, consult with home country regulator
and may require a legal opinion regarding equivalency.
EU: USE OF 3RD COUNTRY TR
53
■ Counterparties and CCPs have to ensure that derivative contracts are reported to a trade
repository established in the EU and registered with ESMA pursuant to Article 55 or recognised
by ESMA in accordance with Article 77 of EMIR.
■ Repositories established in a non-EU country that apply for recognition can only be recognised
if:
> Commission has adopted an implementing act determining that the legal and supervisory
framework of such third country is “equivalent and enforceable” including corresponding
guarantees of professional secrecy; and
> Council has negotiated international agreement regarding mutual access and exchange of
information and ESMA has established cooperation arrangements with the relevant
competent authorities in 3rd countries supervising such TR.
Registered TRs
Recognised SDR
US: USE OF NON-US FACILITIES
54
■ If the clearing and reporting requirements apply to a cross-border swap:
Reporting
Under the Proposed ET Guidance, substituted compliance is permitted
for swaps between a non-US SD/MSP and a non-US person (even if
guaranteed by a US person)
The CFTC must have “direct access” to the swap data
Clearing
Under the proposed ET Guidance, substituted compliance is permitted
for swaps between a non-US SD/MSP and a non-US person (even if
guaranteed by a US person)
Substituted compliance will be permitted if (i) the local jurisdiction has a
comparable clearing mandate, and (ii) the clearing agency is exempt
from DCO registration
EU: USE OF 3RD COUNTRY CCP
55
■ Clearing obligation can be complied with by clearing through a CCP established in the Union
and authorised by a NCA under Article 14 or established in a third country and recognised by
ESMA under Article 25 of EMIR.
■ CCPs established in a non-EU country that apply for recognition can only be recognised if:
> Commission has adopted an implementing act determining that the legal and supervisory
arrangements of a third country ensure that CCP authorised in such country comply with
requirements that are “equivalent” to the requirements set out in EMIR; and
> ESMA has established cooperation arrangements with the relevant competent authorities
in 3rd countries supervising such CCP.
Authorised CCP
Recognised DCO
CONFIRMATIONS
56
■ EMIR applies also to intra-group transactions
■ CFTC confirmations rule only applies to SDs and MSPs (no obligation
between two end users)
FCs/NFC+s entered into: delay:
CDS/IRS by 28 Feb 2014 T+2
CDS/IRS after 28 Feb 2014 T+1
Other by 31 Aug 2013 T+3
Other 31 Aug 2013 – 31
Aug 2014
T+2
Other after 31 Aug 2014 T+1
NFCs entered into: delay:
CDS/IRS by 31 Aug 2013 T+5
CDS/IRS 31 Aug 2013 – 31
Aug 2014
T+3
CDS/IRS After 31 Aug 2014 T+2
Other By 31 Aug 2013 T+7
Other 31 Aug 2013 – 31
Aug 2014
T+4
Other 31 Aug 2014 T+2
OTHER RISK MITIGATION RULES
57
■ Portfolio reconciliation
■ Portfolio compression
■ Dispute resolution
- agreed framework to resolve any disputes (third party arbitration or
market polling)
- special procedure if not resolved within 5 BDs
EMIR (FCs &
NFC+s):
50 or less – quarterly
51-499 – weekly
500 or more - daily
CFTC (SDs/MSPs):
50 or less -
quarterly
51-499 - weekly
500 or more - daily
EMIR (FCs/NFC+s/NFCs):
500 or more - semi-annual
CFTC (SDs/MSPs):
no periodic requirement
EMIR (NFCs):
100 or less –
annually
more than 100 –
quarterly
CFTC (SD/MSP with
non-SDs/MSPs):
100 or less - annually
more than 100 –
quarterly
MARK TO MARKET/MARK TO MODEL
Page 58
■ Applies to FCs and NFC+s
daily marking-to-market of outstanding contracts;
where market conditions prevent MTM, marking to model allowed but
model has to be annually approved by the board (or a delegated
committee);
included in the daily reports to the TRs.
■ Under CFTC rules non-SD/MSP counterparty has a right to request daily
mark-to-market for uncleared swaps (MTM not reported).
3. CONCLUSION
MAIN CONCERNS
60
■ Complex compliance and control/monitoring systems.
■ Absence of equivalence / comparable & comprehensive determinations
creates uncertainties around availability of substituted compliance.
■ Registration requirements for entities dealing with U.S. counterparties put
U.S. counterparties in a competitive disadvantage.
■ Differences in how “hedging” is defined.
■ Possible need for corporate restructuring for large multi-national non-
financial companies as a result of final rules (MSP category vs. NFC+
category).
Page 61
Vladimir Maly
Vladimir Maly is a partner in the Corporate Department in the London office of Latham & Watkins focusing on regulatory and transactional advice relating to the use of derivative instruments in cross-border financing and corporate transactions. Mr. Maly is a member of the ISDA Financial Law Reform Committee.
Expertise
He specialises in particular in
advising banking and
investment management
clients in relation to a wide
range of financial products,
including equities, funds,
fixed income and
commodities. Relevant
experience includes advising
clients in connection with the
regulatory change with
respect to the secondary
markets, custody services
and clearing.
Recognition highlights
Mr. Maly has been described as being
“flexible, quick, calm under pressure,
and sensitive to clients’ needs”. Legal
500 UK 2011
Education
LLM, Tulane University Law School,
2000
Bar qualifications
England and Wales (Solicitor)
New York
Languages
English, French, German, Russian
Partner, London
O +44.20.7710.1884 E [email protected]
Page 62
Peter Y. Malyshev
Peter Y. Malyshev, counsel, practices corporate law in the firm’s Washington, D.C. and New York offices and focuses his practice on regulatory, compliance and transactional issues relating to commodities, securities and derivatives products markets.
Expertise
Mr. Malyshev assists various
derivatives markets participants
with formulating their regulatory
compliance efforts under the
Dodd-Frank Act and the
Commodity Exchange Act; these
clients include swap execution
facilities (SEFs), swap data
repositories (SDRs), swap dealers
and major swap participants as
well as end-users, futures
commission merchants,
introducing brokers, designated
contract markets (DCMs),
derivatives clearing organizations
(DCOs) and clearing agencies,
“special entities” as well as
commodity pool operators (CPOs)
and commodity trading advisors
(CTAs) and industry trade
associations. These entities
include both US and non-US-
based entities that require
assistance with extraterritoriality
and inter-affiliate transactional
application of the Dodd-Frank Act,
such as foreign boards of trade
(FBOTs), non-US intermediates
as well as foreign regulators.
Recognition highlights
Mr. Malyshev is the founder and the
chairman of the Washington DC Bar
committee on futures and derivatives
Education
J.D., McGeorge School of Law, UOP
1996,
LLM, Georgetown 2002
Bar qualifications
Washington DC
California (inactive),
England and Wales (Solicitor,
inactive)
Languages
English, Russian
Counsel, Washington DC and New York
O +1.202.637.1087 E [email protected]
London
99 Bishopsgate
London EC2M 3XF
t: +44 20 7710 1000
f: +44 20 7374 4460
Washington, D.C.
555 Eleventh Street, NW
Suite 1000
Washington, D.C. 20004-1304
USA
t: +1 202 637 1087
www.lw.com
Latham & Watkins is the business name of Latham & Watkins (London) LLP, a registered limited liability partnership organised under the laws of New York and regulated by
the Solicitors Regulation Authority (SRA No. 203820). A list of the names of the partners of Latham & Watkins (London) LLP is open to inspection at its principal place of
business, 99 Bishopsgate, London EC2M 3XF, and such persons are either solicitors, registered foreign lawyers or European lawyers. We are affiliated with the firm Latham
& Watkins LLP, a limited liability partnership organised under the laws of Delaware
