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Commodities Regulation Update – February 9, 2015

February 10, 2015

Author: Jenny E. Cieplak.

CFTC Commissioner Giancarlo’s recently-issued white paper on the current arc of swaps regulation has given new ammunition to proponents of principle-based oversight of the markets rather than the more recent prescriptive-based approach of the Commission. The Commissioner’s speech before the American Bar Association, the text of which was recently made public, began on a more conciliatory note but quickly moved into a summary of the white paper, including criticism of the open access rules and the all-to-all trading requirement. The open question is whether Commissioner Giancarlo’s calls for reform of the recently-finalized rules will lead to frank discussion of the rules within the Commission, or will lead to the other Commissioners circling the wagons against his calls for change. Chairman Massad has already said that he prefers a more incremental approach to tinkering with the rules.

Last week, the European Securities and Markets Authority stated that they would not propose a clearing mandate for NDF transactions. While ESMA left open the possibility that they would propose such a mandate in the future, they stated that “it is difficult to evaluate at this stage the amount of time needed” to make a determination to require NDF clearing. This should have implications for any NDF clearing mandate that the CFTC may propose, especially given that the CFTC’s Foreign Exchange Markets Subcommittee stated that if the CFTC moved forward with NDF clearing it was crucial for the timeline of any clearing mandate to be harmonized with parallel mandates in Europe.

ESMA also published a consultation paper noting its objections to the European Commission’s easing of clearing requirements for intragroup transactions. In the EC proposal, transactions among affiliates domiciled in any jurisdiction would not be subject to the clearing requirement, provided they met certain other qualifications, for a period of three years. After this three year period, only intragroup transactions among affiliates in Europe and countries with “equivalent” regulation would be exempt from clearing. ESMA objected to the three-year exemption, noting that it would allow uncleared transactions between EU entities and their affiliates in countries with no derivatives regulation whatsoever.

In Washington, President Obama’s budget included increased funding levels for the CFTC as well as the SEC. The budget proposal may help to frame the debate on spending, but it has little chance of getting through a Republican-controlled Congress. Republican lawmakers have resisted Obama’s past efforts to provide more money for agencies responsible for implementing the Dodd-Frank Act, especially now that agencies are turning from rulemaking to enforcement of the new rules. Then again, some industry segments may actually push to increase regulatory budgets, since increased funding will enable the agencies to better keep up with their internal risk monitoring instead of imposing non-bespoke risk requirements.

Meanwhile, Senator Diane Feinstein hopes to reinstate the full swaps push-out rule, which was watered down by Congress in a recent unrelated spending bill.

The Canadian Securities Administrators recently released a consultation paper in which they proposed a framework for the regulation of over-the-counter derivatives trading facilities in Canada that looks remarkably similar to the US framework. Ultimately, the paper sets out the CSA Derivative Committee's recommendations in respect of such things as: (i) a definition of derivatives trading facilities; (ii) the regulatory framework for such facilities; (iii) organizational requirements, which would be comparable to the extent appropriate to those established for marketplaces under NI 21-101; (iv) execution methods; (v) pre-trade and post-trade transparency; and (vi) determining whether certain OTC derivatives should be mandated to trade exclusively on an authorized derivatives trading facility.
Jenny E. Cieplak
Partner – Washington, D.C.
Phone: +1 202.624.2542