OTC Derivatives US/EU comparison EIFR, 18 December 2013

Transcription

1 OTC Derivatives US/EU comparison EIFR, 18 December 2013 Laurence Caron-Habib Head of Public Affairs September 6 th, 2013 G-20 requirements on OTC derivatives Commitment on 4 principles at September 2009 G-20 Summit G-20 requirements All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. Reduce counterparty credit risk Reduce operational risk Increase transparency DFA (TitleVII) EMIR MIFID Review Locally driven initiatives BCBS-IOSCO Margin requirements for non-centrally cleared OTC New capital requirements to cover exposure to CCPs 2

2 New rules to be implemented New requirements (by 31 Dec 2012) For liquid and standardised enough OTC products Clearing obligation Execution on electronic platforms For non-cleared OTC products Margin requirements Risk mitigation techniques For all OTC derivatives (+ listed in the EU) Reporting obligation to a Trade Repositary Effective implementation will start to apply from Q1-13 and will continue until EMIR and DFA Similar but different The requirements are the same but rules may differ Products submitted to the rules Different scope in terms of Entities covered by the rules Content of the rules Extra-territoriality Registration approach / substituted compliance EU approach is based on equivalence and mutual recognition Different timelines On both sides rules are still to be finalised US is globally more advanced in terms of implementation Satisfy both sets of rules will be a challenge 4

3 General timeline (provisional) DFA Clearing obligation Reporting obligation 12/10 SDs/MSPs Starting date for IRS/CDS Category1 Category 2 10/01 10/04 SDs/MSPs Starting date for all others 11/03 10/06 09/09 Non SDs/MSPs Starting date for all products Category 3 Margin reqts for bilateral OTC 25/09 26/11 Consultation reopened Consultation closed Feb BCBS-IOSCO 2d consultation period 15 Mar End of consultation period Q4 BCBS-IOSCO final report CFTC final rules 2012 Feb Rules adoption 16/08 30/09 19/12 Mar July 13 EMIR EC endorse Entry into force (20 ESMA Final implementation ESMA RTS and days after publ. in Report date ITS OJ) EMIR Clearing obligation Reporting obligation 15/09 Deadline for CCP application Nov/Dec 02/12 ESMA authorisation of 6 TRs Starting date for all products/asset classes Q Earliest effective mandatory clearing Risk mitigation techniques for bilateral OTC 15 Mar Timely confirmation and Mark-to-market valuation 15Sept Dispute Resolution, Portfolio Reconciliation, Portfolio Compression Margin reqts for bilateral OTC Feb BCBS-IOSCO 2d consultation period 15 Mar End of consultation period Q4 Final report Q ESAs consultation 5 Extra-territoriality SAME In both legislations, extra-territorial measures to cover transactions that may impact the stability of local markets whereas traded overseas The approach is not the same Registration of major entities submitted to the DFA obligations Concept of substituted compliance at entity and transaction level HOWEVER Equivalence principle at the jurisdiction level Mutual recognition and rules differ on a number of aspects potential overlaps and duplication of rules uncertainty on which rules to be applied potential regulatory arbitrage. 6

4 Extra-territoriality / DFA Rules at this stage DFA Section 722 (d) for activities with a direct and significant connection in, or effect on, commerce in the US applies to all entities (US/non-US) CFTC final guidance (26 July 2013) and CFTC Exemptive Order (22 July 2013) US person definition (Categories A & B) SD / MSP registration De Minimis Threshold determination Substituted compliance approach with Transaction-level and Entity-level requirements Phase-in implementation for non-us SDs and MSPs Deadline on 9 Oct 2013 to comply with clearing and swap processing Deadline on 21 Dec 2013, to comply with CFTC rules on reporting / recordkeeping / all other entity and transaction-level requirements, with the possibility to benefit from substituted compliance in certain situations What does it mean? Non-US entities need to determine if: they have some trades with US persons they have to register with CFTC / SEC (as non-us SD or MSP) Trades involving US counterparties (or non-us SDs/MSPs) always subject to DFA Possibility to benefit from the substituted compliance concept for transactions between 2 non-us persons, even if another regulation applies Substituted compliance apply to firms and transactions (rather than to jurisdictions) 7 Extra-territoriality / EMIR Rules at this stage EMIR (Level 1) Art 4.1.a Clearing obligation / Art Risk mitigation techniques Art Equivalence determination by the EC Art 25 Recognition of non-eu CCPs by ESMA and Art 75 Equivalence of non-eu TRs ESMA advice on equivalence 2 Sep 2013: US / Japan and partially on HK, SING, Australia, Switzerland 1 Oct 2013: final advice for HK, Australia, Switzerland, Canada, Dubaï, India, South Korea ESMA regulatory technical standards (Nov 2013) on trades which have a direct, substantial and foreseeable effect within the Union => for trades between two non-eu counterparties What does it mean? Final decision on equivalence will be made by the European Commission (no deadline) Conditional equivalence introduced by ESMA maintained in the final EC determination? Equivalence is the pre-requisite for non-eu CCP recognition by ESMA Non-EU branches of EU counterparties are submitted to EMIR When a jurisdiction is determined as equivalent, any counterparty located in such a jurisdiction will be able to comply with its own jurisdiction s rules instead of EMIR =>effective implementation? 8

5 Extra-territoriality / latest developments In July 2013, the EC and the CFTC made a common statement related to the objective of having a common path regarding the cross-border issues Rules issued by the CFTC on the SEFs do not seem to be in phase with this common statement Letter sent by Michel Barnier to the CFTC on 30/09 on the SEF authorisation US industry (ISDA, SIFMA, IIB) decision to sue the CFTC (04/12) on its guidance governing overseas trades (footnote 513 of the cross-border guidance) The CFTC is expected to make its final determination on substituted compliance for EU rules by 21 Dec Conclusions In a few words Unprecedented act of international cooperation following the 2008 financial crisis: G20 commitments to reform the global OTC derivatives markets Cross-border coordination is crucial to avoid unnecessary duplicative, inconsistent or conflicting regulations and given the global nature of these operations Coming extra-territorial rules definition in other jurisdictions?? Risk of de-globalisation in the future? Cross-border rules will be a key priority in

6 Appendix Detailed comparison EMIR provisions on extra-territoriality DFA US person definition DFA entity and transaction requirements Concrete examples 11 Different rules on market participants SD MSP FC Enduser Non Financial NFC+ NFC- Different classification of market participants In the US Registration of SDs (if above De MinimisThreshold ) and MSPs (if test applicable) Majority of rules applicable only to SDs and MSPs In EMIR, most rules apply to all market participants 12

7 Different scope of products DFA apply to swaps (and options) Broad definition Swaps (CFTC) and Securities Based Swaps (SEC) Exemption for spot and forwards FX spots Some physically settled commodity and security forwards US Treasury exemption on physically-settled FX forwards and swaps from clearing, trade execution and margin requirements EMIR apply to derivatives Broad range Futures and forwards included Exemptions FX spots Some physically settled commodity transactions FX forwards and swaps? Scope of clearable products still not defined Final rules on scope of products issued by the CFTC and SEC in Extraterritoriality Regulatory Framework EMIR (1/2) 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 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: ü.a direct, substantial and foreseeable effect within the Union 14

8 Extraterritoriality Regulatory Framework EMIR (2/2) EMIR Article : Mechanism to avoid duplicative or conflicting rules. The Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of the relevant third country are equivalent to the requirements resulting from the Regulation, ensure protection of professional secrecy that is equivalent to that set out in this Regulation and are being effectively applied and enforced in an equitable and non-distortive manner so as to ensure effective supervision and enforcement in that third country. 15 US person definition any natural person who is a resident of the United States any estate of a decedent who was a resident of the United States at the time of death any legal entity other than an entity that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States any pension plan for the employees, officers or principals of a legal entity unless the pension plan is primarily for foreign employees of such entity any 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 any investment fund or other collective investment vehicle and that is majority-owned by one or more US persons (where majority-owned means beneficial ownership of more than 50% of the equity or voting interest in the vehicle), except any vehicle that is publicly offered only to non-u.s. persons and not offered to U.S. persons any legal entity that is directly or indirectly majority-owned by one or more US persons and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity 16

9 Entity and Transaction Level Requirements Entity level requirements divided into two types: Category 1, mainly those related to capital adequacy, chief compliance officer, risk management, swap data record keeping (except for certain aspects pertaining to complaints and sales materials), and Category 2, mainly those pertaining to swap data repository reporting, and those aspects of swap data record keeping related to complaints and sales materials, and large trader reporting. Transaction level requirements divided into two types: Category A mainly those pertaining to mandatory clearing and swap processing, margining and segregation for uncleared swaps, mandatory trade execution, swap trading relationship documentation, portfolio reconciliation and compression, real-time reporting; trade confirmation; and daily trading records, and Category B, external business conduct standards. 17 Concrete case (1/3) Example 1 : Non US SD Ex: BNPP Non US Person Ex: French Bank Entity Level requirements Transaction Level requirements Subsituted compliance No 18

10 Concrete case (2/3) Example 2 : Non US Person Ex: French Asset Owner such such as Cardif Foreign branch of a US SD Ex: JPM Chase Ldn Branch Entity Level requirements Transaction Level requirements Only apply to JPM Chase Ldn Category A: substituted compliance Category B: No 19 Concrete case (3/3) Example 3 : Non US SD Ex: BNPP A non-us person that is a Guaranteed Affiliate or a Conduite Ex: JPM Securities Ltd Entity Level requirements Transaction Level requirements Category 1: substituted compliance Category 2 : apply to BNPP Category A: substituted compliance Category B: No 20

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