CFTC Issues No-Action Relief for European MTFs

Ahead of execution mandates due to come into force this weekend in the US, the two bodies say the CFTC would provide conditional, time-limited no-action relief to certain multilateral trading facilities (MTFs) in Europe, which would otherwise likely be caught by US rules. Swap dealers and participants on approved MTFs will also be exempt from the CFTC's business conduct rules regarding swap transactions that come under the execution mandate.

The relief is widely seen as being targeted at London-based facilities, which have expressed concern in recent months that they would be in noncompliance with the rules by not registering as SEFs or designated contract markets (DCMs) with the regulator. The CFTC's move, a form of substituted compliance, is conditional to the extent that it expects processes around pre- and post-trade price transparency to be analogous to the regime in the US, that certain clearing and reporting processes would be equivalent, and that there would be an appropriate level of governmental oversight.

"The two commissions have provided confirmation this week that a global race-to-the-top in derivatives regulation is possible," says Mark Wetjen, acting chair of the CFTC. "As the CFTC moves forward with the swap-trading mandate in the US, it must and will continue to work with its counterparts in Europe and elsewhere to meet the Group of 20 (G20) commitments and ensure that standardized trading on regulated platforms protects global liquidity formation and provides much-needed pre-trade transparency to market participants."

A separate no-action relief will be in force until March 24 for all other registered European MTFs, by which point the CFTC wants the facilities concerned to identify themselves in order to benefit, and to allow for time to comply with requirements for longer relief. The CFTC added that, as the MTFs subject to the no-action relief are regulated under the Markets in Financial Instruments Directive (Mifid), it expects them to meet these requirements.

Regulatory Uncertainty
Certain derivatives are obliged to trade through swap execution facilities (SEFs) in the US starting from February 16 (although, effectively, February 18), and current CFTC rules derived from the Dodd–Frank Act regard any transactions with US persons related to these as being under the Commission's jurisdiction. The issue of extraterritoriality has proved enormously controversial both within and outside of the US, with an industry consortium of trade bodies suing the regulator in late December over the matter.

As the CFTC moves forward with the swap-trading mandate in the United States, it must and will continue to work with its counterparts in Europe and elsewhere to meet the G20 commitments. - Mark Wetjen, CFTC.

In Europe, provisional trilogue agreement over the Mifid II text in January heralded advances in the continent's own moves to implement G20 reforms, which mandate that standardized derivative contracts such as swaps should be executed through electronic platforms and reported to trade repositories. European authorities have authorized the creation of organized trading facilities (OTFs), which will handle non-equity instruments, and there has been widespread speculation as to how interoperable European and US derivatives regimes will be.

Some firms had pre-empted the announcement by registering with the CFTC, such as interdealer broker Icap, which filed papers for its London-based facility to become a SEF last week, regulated by the Washington, DC-headquartered agency.

Questions remain, however, around substituted compliance in the long term, and for facilities outside of the UK, as well as the wider picture of European and US regulatory interoperability without the use of no-action relief letters.

"Following the trilogue agreement on Mifid II last month, this is an important further step in implementing a joined-up, consistent global approach to ensure that financial markets work for the benefit of the real economy," says Michel Barnier, European Commissioner for internal market and services. "In particular this agreement shows how, as G20 commitments move from words to action, regulators can and should work together to ensure that their respective rules interact with each other in the most effective and efficient fashion. This needs to be done without creating regulatory overlaps or loopholes this creating a global level playing field for operators. Today is an important step but far from the final one on the road toward global convergence. We will continue to work closely with the US authorities in implementing the Path Forward agreement."

The CFTC's two no-action letters can be found here (14-15, which handles the broader MTF relief) and here (14-16, which includes specifics on what will constitute the requirements for relief).