On 13 October 2017, the European Commission (EC) adopted, with effect from 3 November 2017, an equivalence decision in relation to the US.
On 13 October 2017, the European Commission (EC) adopted, with effect from 3 November 2017, an equivalence decision in relation to the US with respect to the risk mitigation techniques and margin requirements afforded to un-cleared over-the-counter (OTC) derivative transactions under EMIR.
On the same day, the US Commodity Futures Trading Commission (CFTC) determined that the EU's margin requirements are comparable to the US's margin requirements for un-cleared swaps applicable to swap dealers and major swap participants not subject to prudential regulation.
Also on 13 October 2017, the EC and CFTC jointly announced a common approach relating to the trading obligation for derivatives.
Equivalence is a regulatory concept whereby one jurisdiction adjudges predominantly granular aspects of a third country's legal, supervisory or regulatory framework to be equivalent to that of the determining jurisdiction. Equivalence decisions can enable firms with cross-border relationships and capabilities to comply with only one set of regulations, rather than two. It is important for the harmonisation of international markets, and helps to alleviate the uncertainty, disproportionately increased costs and complexity that arises as a result of differing regulatory requirements and operational burdens.
The EC and CFTC decisions on the treatment of un-cleared OTC derivatives followed on from the CFTC's communication on 27 December 2013 of a comparability determination (an equivalence decision) that exempted certain counterparties from complying with the US risk mitigation techniques (termed, `Transaction Level requirements' in the US) where they complied with EU risk mitigation technique requirements.
The effect of the decisions is to reduce regulatory burdens and enable counterparties that are subject to both EU and US rules to choose between the EU or US rules, while also being in compliance with the rules they choose not formally to adhere to.
This is of practical relevance to those counterparties subject to EU and US risk mitigation techniques and margin requirements, namely relevant EU counterparties subject to margin requirements, US major swap participants, and US swap dealers that had been complying with the EU regime but who may choose to adhere to US margin rules instead.
The decisions also have the effect of enabling transactions between EU and US counterparties that are part of the same group to be classified as intragroup transactions under certain provisions of EMIR in certain circumstances. Such intragroup counterparties are then able to benefit from certain EMIR intragroup exemptions that had previously been available only to group counterparties within the EU. There may also be ramifications for the ancillary activities exemption calculation under MIFID II, pending regulatory clarification.
Broadly speaking, the EU-US joint announcement on a common approach relating to the trading obligation for derivatives (i.e. the obligation under both EU and US regulations for specific derivatives to trade on certain venues) ensures that EU and US counterparties conducting cross-border derivative activities are able to comply with the trading obligation and trade execution requirement in the EU and US respectively, by ensuring that firms are able to fulfil their trading obligations on either EU or US venues.
This is not a binding decision, but is merely a statement of intent from both regulators, and is line with the approach taken by the CFTC and the EC in 2016 in relation to cross-border issues for central counterparties under EMIR. However, with the US trade execution requirement already in force, and the EU's trading obligation for derivatives due to come into force on 3 January 2018, we expect this to be an area of intense industry scrutiny, and heightened regulatory priority, to ensure that EU and US organisations (RC) can trade on each other's registered platforms. A determination is hoped for in November.
Equivalence is a complex area especially with regards to different or conflicting aspects of rules - in many cases, where there are areas of uncertainty, the industry has taken an approach of adopting the higher standard especially as this is a safer option and more explainable to regulators and counterparties. KPMG member firms are able to help clients in navigating through this area and enable them to come up with pragmatic solutions.
1EMIR is Regulation (EU) No. 648/2012
2MiFID II (Directive 2014/65/EU) is the recast of the original Markets in Financial Instruments Directive and MiFIR is the Markets in Financial Instruments Regulation (Regulation (EU) No.600/2014)