Sidley Derivatives | Q3 2016 • 1

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Q3 2016

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U.S. DERIVATIVES DEVELOPMENTS: CFTC AND NFA

CFTC Staff Issues Advisory Reminding Futures Commission Merchants and Introducing Brokers of Compliance Requirements Regarding Suspicious Activity Reporting and Economic Sanctions Programs

On July 6, 2016, the CFTC’s DSIO issued a Staff Advisory to FCMs and IBs reminding them of their obligations to file with the FinCEN a suspicious activity report concerning any suspected violation of Federal law or regulations or suspicious activity related to money laundering, terrorist financing or other criminal activity. The Staff Advisory also reminded FCMs and IBs to comply with the economic sanctions programs administered by the Office of Foreign Assets Control (OFAC).

A copy of the Staff Advisory is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-60.pdf.

CFTC Extends Designation of DTCC-SWIFT as Provider of Legal Entity Identifiers

On July 18, 2016, the CFTC issued an order providing for a one-year extension of the designation of the Depository Trust & Clearing Corporation and Society for Worldwide Interbank Financial Telecommunication (DTCC-SWIFT) utility as a provider of legal entity identifiers (LEIs). Registered entities and swap counterparties subject to CFTC jurisdiction generally must obtain an LEI to comply with the CFTC’s recordkeeping and reporting rules. DTCC-SWIFT was originally designated by a CFTC order issued on July 23, 2012 and its designation was extended on an interim basis for one year on July 17, 2015. The CFTC continues to work on issues related to transition to a global LEI system.

A copy of the CFTC order is available at: https://www.gpo.gov/fdsys/ pkg/FR-2016-07-21/pdf/2016-17229.pdf.

Exemption for a Fund of Funds’ Quarterly Account Statements Required by CFTC Regulation 4.7(b)(2)

On July 20, 2016, the CFTC’s DSIO issued Exemptive Letter 16-67 providing for exemptive relief from the requirement in CFTC Regulation 4.7(b)(2) that CPOs distribute quarterly account statements to their participants within 30 days after the end of each quarter. The relief was provided based on the facts and circumstances specific to the CPO receiving the relief, including the fact that each pool operated by the CPO is a “fund of funds” that must receive account statements from the underlying collective investment vehicles in which each pool invests before the CPO can produce its own account statements. The relief is also subject to the following conditions: (i) the CPO’s distribution to all pool participants within 45 calendar days

U.S. DERIVATIVES DEVELOPMENTS

CFTC and NFA .............................. 1 SEC and FINRA ............................12 Other .............................................13

U.S. ENFORCEMENT DEVELOPMENTS .............................14

EUROPEAN DERIVATIVES DEVELOPMENTS .............................15

ASIA DERIVATIVES DEVELOPMENTS .............................18

GLOSSARY OF FREQUENTLY USED TERMS ........... 25

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after the end of each month of an account statement that includes all of the information required to be included in a CFTC Regulation 4.7(b)(2) quarterly account statement and that is signed and affirmed in accordance with CFTC Regulation 4.22(h); and (ii) the CPO informing current and prospective pool participants that such account statements will be provided within 45 calendar days after the end of the covered month.

A copy of Exemptive Letter 16-67 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-67.pdf.

CFTC Staff Issues Guidance on Derivatives Clearing Organization Recovery and Wind-Down Planning

On July 21, 2016, the CFTC’s DCR issued Letter 16-61, a communication providing guidance to DCOs regarding the development of their recovery and wind-down plans (RWPs). Under CFTC Regulation 39.39(b), DCOs that have been designated to be systemically important by the Financial Stability Oversight Council or that have elected to be subject to subpart C of Part 39 of the CFTC Regulations are required to maintain viable plans for a recovery or orderly wind-down necessitated by: (i) uncovered credit losses or liquidity shortfalls; and, separately, (ii) general business risk, operational risk or any other risk that threatens the DCO as a going concern. As part of the development of such RWPs, DCOs are required to identify scenarios that may potentially prevent the DCO from being able to meet its obligations or provide its critical operations and services as a going concern and to assess the effectiveness of a full range of options for recovery or orderly wind-down. The DCR’s guidance fleshes out this requirement, recommending specific risk scenarios that the DCO should analyze when developing the RWPs and advising on how best to evaluate whether particular recovery and wind-down tools should be included in the RWPs. Among other things, the DCR’s guidance highlights the importance of addressing the interconnections and interdependencies between a DCO and its affiliates, service providers and relevant stakeholders when analyzing the impact of an RWP, and carefully setting forth the DCO’s governance arrangements in implementing an RWP.

A copy of Letter 16-61 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-61.pdf.

CFTC Clarifies Chief Compliance Officer Reporting Line Requirements

On July 25, 2016, the CFTC’s DSIO issued a staff advisory (the CCO Advisory) clarifying the reporting line requirements for Chief Compliance Officers (CCOs) of CFTC-registered swap dealers, FCMs and MSPs (together, Covered Entities) under CFTC Regulation 3.3. Generally, Regulation 3.3 requires the board of directors or a senior officer of a Covered Entity to appoint a CCO to supervise compliance matters and report to the board or senior officer at least annually. In the adopting release for Regulation 3.3, the CFTC emphasized that the CCO must remain independent from trading unit personnel to avoid conflicts of interest when considering compliance matters. Because the boards and senior officers of Covered Entities are at times removed from the activities of their respective derivatives businesses, Covered Entities often delegate members of senior management to consult with and supervise the CCO in the normal course of business. In response to inquiries from Covered Entities regarding whether this senior management supervision complies with Regulation 3.3, the CFTC indicated in the CCO Advisory that, depending on the facts and circumstances, such supervisory relationships are acceptable, provided that the relevant members of senior management understand the Covered Entity’s compliance and regulated activities and are sufficiently independent from the swap trading or FCM business activities that they are not subject to conflicts of interest. Notwithstanding these relationships with senior management, CCOs must continue to report to the board or senior officers on at least an annual basis.

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A copy of the CCO Advisory is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-62.pdf.

CFTC and Four Canadian Authorities Sign Memorandum of Understanding Regarding Supervision of Cross-Border Regulated Entities

On July 27, 2016, the CFTC announced that they signed additional counterparts to a 2014 Memorandum of Understanding (MOU) previously executed with the regulatory authorities of the Canadian provinces of Alberta, British Columbia, New Brunswick, Nova Scotia, Ontario and Saskatchewan. The counterparts add the Canadian provinces of the Northwest Territories, Nunavut, Prince Edward Island and Yukon. The MOU provides for the cooperation and exchange of information between the CFTC and the Canadian regulators with respect to the supervision of entities regulated by both the CFTC and the Canadian regulators. The CFTC and the Canadian regulators anticipate that they will primarily cooperate through informal consultations, formal cooperation and the exchange of non-public information.

A copy of the MOU for the Northwest Territories can be found at: http://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-ssnt-supervisorymou072716.pdf.

A copy of the MOU for Nunavut is available at: http://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-ssnu-supervisorymou072716.pdf.

A copy of the MOU for Prince Edward Island is available at: http://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-ssp-supervisorymou072716.pdf.

A copy of the MOU for Yukon is available at: http://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-ssy-supervisorymou072716.pdf.

CFTC Proposes to Amend Exemption From Registration for Certain Foreign Persons

On July 27, 2016, the CFTC issued a proposed amendment (the Proposed Amendment) to current exemptions from CFTC registration for FCMs, IBs, CTAs and CPOs (Covered Entities) in connection with commodity interest transactions entered into solely on behalf of persons located outside the United States or on behalf of certain international financial institutions. In general, absent an exemption, Covered Entities engaged in the offer and sale of, and providing advice concerning, commodity interest transactions (including commodity options, futures and swaps) must register with the CFTC. Section 3.10(c) of the CFTC’s regulations exempts Covered Entities from registration with respect to activities involving commodity interest transactions if: (i) the Covered Entity is located outside the United States; (ii) the Covered Entity acts only on behalf of persons located outside the United States; and (iii) the commodity interest transaction is submitted for clearing through a registered FCM. The Proposed Amendment codifies the no-action relief previously provided by the CFTC to Covered Entities by removing the requirement that the commodity interest transaction must be cleared through an FCM if such transaction is not subject to a CFTC clearing requirement. If the Proposed Amendment is adopted, a Covered Entity with respect to commodity transactions not subject to a CFTC clearing requirement would qualify for an exemption from registration if it is located outside the United States and acts only on behalf of persons located outside the United States or specified international financial institutions.

A copy of the Proposed Amendment is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-18210a.pdf.

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CFTC No-Action Relief From Presenting Annual Reports in Accordance With U.S. GAAP

On July 29, 2016, the CFTC’s DSIO issued Exemptive Letter 16-66 providing no-action relief to an offshore investment vehicle from CFTC Regulation 4.7(b)(3). This requires that a CPO of a commodity pool operated pursuant to CFTC Regulation 4.7 must prepare annual financial reports in accordance with generally accepted accounting principles, which has consistently been interpreted by DSIO staff to mean United States Generally Accepted Accounting Principals (U.S. GAAP). In granting no-action relief, DSIO referred to guidance previously offered to CPOs in a letter dated February 2, 2011 (the Annual Reporting Letter). In the Annual Reporting Letter, DSIO made available, on a case-by-case basis, relief from the U.S. GAAP requirement of CFTC Regulation 4.22, conditioned upon the offshore pool following the additional elements now required by CFTC Regulation 4.22(d)(2)(i) with respect to the use of International Financial Reporting Standards.

A copy of Exemptive Letter 16-66 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-66.pdf.

A copy of the Annual Reporting Letter is available at: http://www.cftc.gov/idc/groups/public/@iointermediaries/documents/file/cpoannualguidanceletter2010.pdf.

CFTC Proposes Amendments to Rules Governing Annual Reports of Commodity Pool Operators

On July 29, 2016, the CFTC proposed amendments to CFTC Regulation 4.22 governing CPO annual reports that would generally: (i) permit CPOs of pools organized in non-U.S. jurisdictions (Non-U.S. Pools) to use additional generally accepted accounting standards in place of U.S. GAAP when preparing the pool’s financial statements; and (ii) relieve the CPO of a newly formed pool from the obligation to have its first annual report audited for short initial “stub” fiscal years. The amendments are intended to codify exemptive relief previously provided by the CFTC staff on a case-by-case basis to CPOs, such as its no-action letter of July 29, 2016 referenced above.

CPOs are required to distribute an annual report to pool participants that contains financial statements prepared in accordance with U.S. GAAP. However, since 2009 the CFTC has permitted CPOs of Non-U.S. Pools to use International Financial Reporting Standards (IFRS) if certain enumerated conditions are met. The CFTC now proposes to expand the list of alternative accounting standards beyond IFRS to include the generally accepted accounting standards followed in the UK, Ireland, Luxembourg and Canada. In addition to meeting conditions substantially similar to those currently required to use IFRS, a CPO of a Non-U.S. Pool must represent that the jurisdiction of its organization follows the relevant accounting principals the CPO wishes to use in lieu of U.S. GAAP. CPOs are permitted to use the same accounting standards used in the annual report in any periodic reports distributed to pool participants, so the proposed relief would automatically extend to such periodic reports as well.

Annual reports currently must be audited by an independent public accountant regardless of how short a period is covered in a pool’s initial fiscal year. The CFTC recognized that the cost of such an audit was unduly burdensome for small pools. Accordingly, the proposed amendments would permit a CPO to deliver an unaudited annual report for a pool that was formed three or fewer months prior to the end of its initial fiscal year. For this relief to be available, the pool must have had no more than 15 participants and no more than US$1.5 million in gross capital subscriptions and satisfy other specified conditions.

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On September 20, 2016, the NFA submitted a supportive comment letter to the CFTC. The NFA also urged the CFTC to extend the accounting standards relief applicable to a pool’s annual report to the quarterly reports that CPOs must file with the NFA and the periodic account statements that CPOs distribute to participants in certain pools that are privately offered solely to qualified eligible persons (4.7 Pools). With respect to the stub year audit relief, the NFA encouraged the CFTC to consider whether the appropriate start date of an audit period should be when the pool commenced trading, rather than when the pool was formed. The NFA commented that using the date a pool commenced trading is consistent with recent staff relief granted on a case-by-case basis.

The comment period for the proposed amendments expired on September 20, 2016.

The CFTC proposing release is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-08-05/pdf/2016-18400.pdf.

The NFA comment letter is available at: https://www.nfa.futures.org/NFA-regulation/regulationComment.asp?ArticleID=4744.

Extension of Relief From Transaction-Level Swaps Requirements for Non-U.S. Swap Dealers Using Agents Located in the United States

On August 4, 2016, the CFTC’s DSIO, DCR and DMO jointly issued time-limited No-Action Letter 16-64, that extends relief previously granted to non-U.S. swap dealers under CFTC No-Action Letters 13-71, 14-01, 14-74, 14-140 and 15-48. Specifically, No-Action Letter 16-64 provides relief to non-U.S. swap dealers from the CFTC staff’s interpretation under CFTC Staff Advisory No. 13-69 that a non-U.S. swap dealer regularly using personnel or agents located in the United States to arrange, negotiate or execute a swap with a non-U.S. person generally must comply with the CFTC’s “transaction-level” requirements for swaps. The relief under No-Action Letter 16-64 is available until the earlier of September 30, 2017 and the effective date of any further CFTC action with respect to this issue. The CFTC issued a proposed rule on October 11, discussed in the Sidley Update referenced below, that addresses the cross-border application of certain of its swap rules that would, in part, supersede Staff Advisory 16-64.

A copy of No-Action Letter 16-64 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-64.pdf.

A copy of the Sidley Update that addresses CFTC Staff Advisory No. 13-69 is available at: http://www.sidley.com/news/cftc-staff-action-addresses-cftc-cross-border-jurisdiction-echoes-secs-proposed-territorial-approach-12-06-2013.

A copy of the Sidley Update addressing the CFTC’s proposed rule of October 11 is available at: http://www.sidley.com/en/news/2016-11-09-derivatives-update.

CFTC Issues Final Response to Remand Order in Litigation Regarding the Extraterritorial Application of Certain Swap Rules

On August 4, 2016, the CFTC released a final response (the Final Response) to the remand order issued by the U.S. District Court for the District of Columbia (the District Court) regarding the costs and benefits of the extraterritorial application of certain of the CFTC’s swap rules adopted pursuant to Title VII of the Dodd-Frank Act. The Final Response relates back to the December 2013 lawsuit brought by three major industry groups against the CFTC, challenging, on various grounds, the CFTC’s July 2013 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (the Cross-Border Guidance), as well as the extraterritorial application of a number of the CFTC’s swap rules. In September 2014, the District Court issued a decision granting summary judgment in favor of the CFTC on most

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issues considered. However, without vacating or suspending the affected rules, the District Court ordered the CFTC to better explain the CFTC’s position with respect to the costs and benefits associated with the cross-border application of certain swap rules. The affected rules include, among others, rules covering real-time reporting, swap data repository reporting, registration of swap dealers and the definitions of certain terms such as “swap dealer,” “eligible contract participant” and “swap execution facility.” The Final Response reflects the CFTC’s approach to international harmonization of swaps regulations and concludes that there is no need for the CFTC to make changes to the substantive requirements of the remanded rules.

A copy of the Final Response is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-08-16/pdf/2016-18854.pdf.

A copy of the Sidley Update regarding the CFTC’s Cross-Border Guidance is available at: http://www.sidley.com/news/derivatives_update_071913.

CFTC Publishes Final Report on Swap Dealer De Minimis Threshold

On August 15, 2016, the CFTC staff issued the final report (the Staff Report) on various aspects of the CFTC’s swap dealer de minimis threshold. The final report supplements the staff’s preliminary report issued on November 18, 2015, as directed by CFTC Regulation 1.3(ggg)(4)(ii)(B). Market participants that exceed US$8 billion in gross notional swap dealing activity over a rolling 12-month period are required to register with the CFTC as swap dealers during a phase-in period that is currently in effect. Under CFTC Rule 1.3(ggg), the phase-in period is scheduled to end, and the threshold scheduled to fall to US$3 billion (the Threshold Reduction), at the end of December 2017, unless the CFTC takes action (on October 13, 2016 the CFTC extended the date for the Threshold Reduction to December 2018 to give the CFTC additional time to consider the structure and level of the threshold).

The Staff Report considers the swap data available to the CFTC in light of the current US$8 billion de minimis threshold, the potential effects of raising or lowering the threshold, and several possible alternatives to the current de minimis exception, including: (i) a notional de minimis threshold specific to each asset class; (ii) a multi-factor approach that would potentially include counterparty count and/or transaction count metrics in the de minimis exception, in addition to a gross notional dealing threshold; (iii) a multi-tiered approach where the regulatory requirements associated with swap dealer registration are commensurate with an entity’s level of dealing activity; and (iv) the exclusion from an entity’s de minimis calculation of swaps that are traded on a registered or exempted SEF or DCM and/or cleared. The final Staff Report is intended to form the basis for CFTC action with respect to the de minimis exception.

A copy of the final Staff Report is available at: http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.

A copy of the CFTC order extending the date for the automatic drop in the de minimis threshold is available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister101316.pdf.

CFTC Responds to SEC Rule 2a-7 Amendments by Limiting the Ability of FCMs and DCOs to Invest in Certain Money Market Funds

The SEC recently approved amendments to Rule 2a-7, which came into effect on October 14, 2016, that require money market mutual funds (MMFs) that invest primarily in corporate debt securities (Prime MMFs) and that allow (but do not require) MMFs that invest primarily in government debt securities to adopt terms that would permit the MMF to suspend redemptions or impose liquidity fees on investors (MMFs that adopt such terms, the Electing

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Government MMFs). CFTC Regulations have historically permitted FCMs and DCOs to invest their own funds and customer funds in certain MMFs, in part because of the high degree of liquidity of MMFs. The CFTC no longer believes that Prime MMFs and Electing Government MMFs are sufficiently liquid to allow FCMs and DCOs to invest funds in such MMFs. On August 8, 2016, the CFTC’s DSIO and DCR, respectively, issued letters addressing the impact of the Rule 2a-7 amendments.

The first of these letters, DSIO’s No-Action Letter 16-68, addresses the impact of the Rule 2a-7 amendments on CFTC Regulation 1.25, the regulation that sets forth the “permitted investments” an FCM may make with futures customer funds and its own “residual interest amount” (i.e., the amount of its own capital that the FCM deposits in its customer segregated account to cover its customers’ aggregate undermargined amounts). CFTC Regulation 1.25 allows FCMs to invest futures customer funds and its residual interest amount in MMFs that meet certain requirements – requirements that, after the amendments to Rule 2a-7 come into effect, Prime MMFs and Electing Government MMFs will no longer meet, according to DSIO. No-Action Letter 16-68 grants no-action relief to FCMs, permitting them to continue to invest their residual interest amounts, though not futures customer funds, in Prime MMFs and Electing Government MMFs.

The second of these letters, DCR’s Interpretive Letter 16-69, provides guidance regarding the potential impact of the Rule 2a-7 amendments on certain of the obligations imposed on DCOs under the CFTC’s Part 39 regulations. Specifically, because of the liquidity restrictions on Prime MMFs and Electing Government MMFs under the Rule 2a-7 amendments, Interpretive Letter 16-69 cautions DCOs that, as of October 14, 2016, DCOs will not be permitted to: (i) hold or accept shares of Prime MMFs or Electing Government MMFs as initial margin; (ii) hold its assets or funds belonging to clearing members or their customers; or (iii) invest its own funds in shares of Prime MMFs or Electing Government MMFs.

A copy of No-Action Letter 16-68 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-68.pdf.

A copy of Interpretive Letter 16-69 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-69.pdf.

CFTC Grants Registration to Seed SEF LLC

On August 23, 2016, the CFTC issued an Order of Registration to Seed SEF LLC (Seed SEF) of Chicago, Illinois, granting it fully registered status with the CFTC as an SEF. According to Seed SEF’s website, Seed SEF will provide agricultural producers, processors and manufacturers risk management services for emerging agricultural products, and one of its first products will be industrial hemp derivatives. The number of fully registered SEFs is now 23.

A copy of Seed SEF’s Order of Registration is available at: http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/orgsefseedorderofreg160823.pdf.

A copy of the related CFTC press release is available at: http://www.cftc.gov/PressRoom/PressReleases/pr7433-16.

CFTC and Two Mexican Authorities Sign Memorandum of Understanding Regarding Supervision of Cross-Border Regulated Entities

On August 31, 2016, the CFTC signed a Memorandum of Understanding (MOU), with the Comisión Nacional Bancaria y de Valores (CNBV) and the Banco de México (BDM), two Mexican regulatory authorities, regarding the supervision of entities regulated by the CFTC, the CNBV and the BDM. The CFTC, the CNBV and the BDM anticipate that they will primarily

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cooperate through informal consultations, formal cooperation and the exchange of non-public information.

A copy of the MOU is available at: http://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-cnbv-bdm-supervisorymou08.pdf.

CFTC Grants No-Action Relief to Include Security-Based Swaps in Product Set for Initial Margin for Uncleared Swaps

On August 23, 2016, the CFTC’s Division of Swap Dealer and Intermediary Oversight and Division of Clearing and Risk (the Divisions) issued No-Action Letter 16-71, responding to a request for interpretation from ISDA regarding the inclusion of security-based swaps in the product set for the calculation of initial margin requirements under the CFTC’s margin rules for uncleared swaps (CFTC Margin Rules). The CFTC Margin Rules permit initial margin to be calculated on a portfolio basis, subject to certain conditions; however, unlike the margin rules issued by the U.S. prudential regulators, the CFTC Margin Rules do not apply to security-based swaps. As a result, margin requirements can be calculated for swaps and security-based swaps on a portfolio basis under the prudential regulators’ margin rules but not under the CFTC Margin Rules.

The Divisions recommend in this Letter that the CFTC not take enforcement action against non-prudentially regulated CFTC-registered swap dealers that collect and post margin on a portfolio basis for swaps and security-based swaps, provided that the swaps and security-based swaps meet certain conditions.

A copy of No-Action Letter 16-71 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-71.pdf.

Implementation Update on U.S. Uncleared Swap Margin Rules

On September 1, 2016, the U.S. margin rules for uncleared swaps took effect for uncleared swaps entered into between certain of the largest CFTC-registered swap dealers (Phase I Entities). In order to ease the compliance burden for Phase I Entities, the CFTC issued time limited no-action relief applicable to non-bank swap dealers until October 3, 2016 with respect to the requirement that initial margin be segregated with an unaffiliated, third-party custodian pursuant to a custodial agreement that meets the requirements of the CFTC’s margin rules.

The next major implementation date for the U.S. margin rules is March 1, 2017. Beginning on this date, all CFTC-registered swap dealers will be required to exchange variation margin with their “financial end user” counterparties with respect to uncleared swaps entered into on or after March 1, 2017.

A copy of the Sidley Update summarizing the U.S. margin rules adopted by the CFTC and the U.S. prudential regulators is available at: http://www.sidley.com/news/2016-01-20-derivatives-update.

National Futures Association Proposes to Require Commodity Pool Operators and Commodity Trading Advisors to Report Financial Ratios

On September 6, 2016, the NFA proposed an Interpretive Notice (the Interpretive Notice) on NFA Compliance Rule 2-46 along with an amendment to the Rule itself. Compliance Rule 2-46 requires CPOs and CTAs to file Forms PQR and PR, respectively, on a quarterly basis to provide information important for the NFA’s compliance oversight of member firms.

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The NFA has long collected firm-specific financial information from FCMs and IBs in order to monitor such firms’ financial conditions. The NFA has determined that such information should also be collected directly from CPOs and CTAs and has proposed to revise Forms PQR and PR to collect two firm-specific financial ratios. The first is the Current Assets/Current Liabilities Ratio (CA/CL Ratio), which divides a firm’s “current assets” by its “current liabilities” and is intended to measure a firm’s liquidity. The second is the Total Revenue/Total Expenses Ratio (TR/TL Ratio), which divides a firm’s “total revenue” by its “total expenses,” in each case earned or incurred during the prior 12 months, and is intended to measure a firm’s operating margin. The NFA has proposed the Interpretive Notice to provide guidance to CPOs and CTAs when reporting the new financial ratios, including definitions and examples of “current assets,” “current liabilities,” “total revenue” and “total expenses.” The financial ratios must be reported based on U.S. Generally Accepted Accounting Principles or another internationally recognized accounting standard and use the accrual method of accounting.

The Interpretive Notice indicates that there would be no minimum ratio percentages; instead, the information would be collected solely to enhance the NFA’s existing oversight program. However, it would be a rule violation if a CPO or CTA provided materially false or misleading information when reporting the ratios. Accordingly, CPOs and CTAs would be required to maintain records that support the calculation of the ratios and be able to demonstrate to the NFA how the ratios were calculated.

Because CPOs can satisfy their obligation to submit NFA Form PQR by filing CFTC Form PQR, the NFA has proposed to amend Compliance Rule 2-46 to require such CPOs to provide the NFA the additional information collected in the amended NFA Form PQR in the form and manner requested by the NFA.

A copy of the letter of the Senior Vice President and General Counsel of the NFA to the CFTC setting forth the proposals is available at: https://www.nfa.futures.org/news/PDF/CFTC/CR-2-46_InterpNotc9071_082016.pdf.

CFTC Issues Comparability Determination Regarding Japan’s Margin Requirements for Uncleared Swaps

On September 8, 2016, the CFTC approved a comparability determination permitting substituted compliance with most of the Japanese margin requirements for uncleared swaps. Under Part 23 of the CFTC’s Regulations, certain non-U.S. swap dealers and MSPs are permitted to comply with the margin rules of another jurisdiction in lieu of complying with the CFTC’s rules if the CFTC determines that the foreign requirements are comparable to those of the CFTC. In its first comparability determination with respect to margin requirements for uncleared swaps, the CFTC found the requirements under Japanese law generally to be comparable to those under the CEA and CFTC regulations. However, in contrast to the CFTC’s rules, the Japanese rules do not apply to inter-affiliate swaps and the CFTC therefore excluded the treatment of inter-affiliate swaps from its comparability determination.

The CFTC’s comparability determination does not impact swap dealers subject to U.S. prudential regulation, such as banks and bank holding companies. Such swap dealers must wait for comparability determinations from the applicable prudential regulator. To date, no prudential regulator has issued any comparability determinations with respect to uncleared swaps margin. However, the CFTC noted that it had consulted with the prudential regulators in making its substituted compliance determination.

A copy of the CFTC’s comparability determination is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-22045a.pdf.

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U.S. Derivatives: CFTC & NFA

CFTC Adopts Final Rules for System Safeguards Testing Requirements

On September 8, 2016, the CFTC adopted two final rules (the System Safeguards Rules) for system safeguards testing requirements: one rule for DCMs, SEFs and SDRs, and the other rule for DCOs. The System Safeguards Rules enhance and clarify existing rule provisions related to cybersecurity and also add new provisions regarding certain aspects of testing. The System Safeguards Rules set forth five types of cybersecurity testing deemed essential to fulfilling system safeguards testing obligations: (i) vulnerability testing; (ii) penetration testing (both internal and external); (iii) controls testing; (iv) security incident response plan (SIRP) testing; and (v) enterprise technology risk assessment. The System Safeguards Rules establish minimum frequency requirements for conducting certain types of cybersecurity testing and require performance of certain tests to be conducted by independent contractors. The compliance date for the vulnerability and SIRP testing requirements is March 20, 2017, and the compliance date for the penetration testing, controls testing and enterprise technology risk assessment requirements is September 19, 2017.

A copy of the final rule with respect to DCMs, SEFs and SDRs is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-22174a.pdf.

A copy of the final rule with respect to DCOs is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-22413a.pdf.

CFTC Chairman Plans to Recommend That the CFTC Abandon its Proposal to Allow Private Rights of Action in RTO/ISO Markets

On September 12, 2016, Chairman Massad sent a letter to four U.S. Senators stating that he will recommend that the CFTC exempt transactions in the organized wholesale electricity markets from private rights of action under Section 22 of the CEA. Chairman Massad’s letter responds to a letter of September 1, 2016 from the four Senators expressing concern that private rights of action would impact the ability of Federal Energy Regulatory Commission to continue to regulate the RTO/ISO markets, as well as create uncertainty for entities participating in these markets. According to Chairman Massad, private rights of action in the Regional Transmission Organization (RTO) and Independent System Operator (ISO) markets “could result in greater costs and uncertainties without necessarily enhancing supervision of markets or consumer protection.” Chairman Massad stated that the CFTC will continue to retain the authority to pursue fraud and manipulation within the RTO/ISO markets. He also notes that aggrieved market participants and consumers can still file complaints with the CFTC, as well as the CFTC’s Whistleblower program. Chairman Massad sent a similar letter on September 13, 2016 to Senator Boozman regarding the CFTC’s proposed amendment impacting Southwest Power Pool.

As we previously reported, on May 10, 2016, the CFTC issued a proposed amendment to the 2013 RTO/ISO Final Order that exempted specified RTO/ISO transactions from certain provisions of the CEA and CFTC regulations. The CFTC’s proposed amendment sought to change that 2013 Order by explicitly stating that the exemption does not apply to actions pursuant to CEA Section 22, which allows for a private right of action. If adopted, the amendment would permit private parties to bring claims under the CEA for fraud and manipulation involving financial energy products traded in the organized wholesale power markets, which is not permitted under the Federal Power Act.

For more information on the CFTC’s proposed amendment, please see the Sidley Update available at: http://www.sidley.com/en/news/cftc-proposal.

A copy of the letter to Chairman Massad of September 1, 2016 is available at: https://www.epsa.org/forms/uploadFiles/3BB0000000016.filename.09.01.16_-_CFTC_-_Private_Right_of_Action_Letter.pdf.

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U.S. Derivatives: CFTC & NFA

A copy of Chairman Massad’s letter of September 13, 2016 is available at: http://www.boozman.senate.gov/public/index.cfm/files/serve?File_id=9B2A576F-A0A1-4652-9797-FC7ED2F0ECC9.

The RTO/ISO Final Order exempting specified RTO/ISO Transactions from regulations is available at: http://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2013-07634.

A copy of the proposed amendment to the above-referenced Final Order is available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister051016.pdf.

CFTC Nominations Cleared for Senate Vote

On September 28, 2016, the Senate Agriculture Committee voted to send to the Senate the nominations of Dr. Christopher Brummer and Mr. Brian Quintenz to serve as CFTC Commissioners for a final confirmation vote. It is not yet known when Senate leadership may approve the vote to be taken up on the Senate floor. If a confirmation vote is not scheduled before the November elections, it is uncertain whether Senate leadership will schedule a vote during the ensuing lame-duck session of Congress. If a vote is not scheduled before the current Congress is adjourned, the newly elected President will have the option either to resubmit the nominations of Dr. Brummer and Mr. Quintenz to the Senate or, alternatively, to choose new nominees. President Obama nominated Dr. Brummer and Mr. Quintenz in March 2016 to fill the vacancies created by the resignations of former Commissioners Mark Wetjen and Scott O’Malia.

The Senate Agriculture Committee’s hearing to consider the nominees is available at: http://www.agriculture.senate.gov/hearings/hearing-to-consider-pending-cftc-nominations.

The prepared statements of Dr. Brummer and Mr. Quintenz, respectively, are available at: http://www.agriculture.senate.gov/imo/media/doc/Testimony_Brummer.pdf; and http://www.agriculture.senate.gov/imo/media/doc/Testimony_Quintenz.pdf.

CFTC Provides No-Action Relief to Australian Swaps Trading Platform and its Participants

On September 14, 2016, the CFTC’s DMO and DSIO jointly issued No-Action Letter 16-72, which qualifies Yieldbroker Pty Limited (Yieldbroker), a licensed Australian SEF regulated by the Australian Securities & Investments Commission that offers direct access to U.S. persons, for no-action relief provided under No-Action Letter No. 15-29 (together with No-Action Letter 16-72, the Letters). The Letters grant Yieldbroker no-action relief from the SEF registration requirements under CEA Section 5h(a)(1) and CFTC Regulation 37.3(a)(1) and allow Yieldbroker to apply on behalf of its participants for no-action relief from the trade execution mandate under CEA Section 2(h)(8), as well as certain reporting requirements under Part 43 and Part 45 of the CFTC Regulations. The Letters also exempt swap dealers and MSPs executing swaps on Yieldbroker facilities from certain business conduct, confirmation and swap trading relationship documentation requirements under Part 23 of the CFTC Regulations. The relief granted under the Letters is contingent on Yieldbroker satisfying certain conditions.

No-Action Letter 16-72 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-72.pdf.

No-Action Letter 15-29 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-29.pdf.

CFTC Expands Clearing Mandate to Additional Interest Rate Swaps

On September 28, 2016, the CFTC adopted a final rule amending CFTC Regulation 50.4(a) to require certain additional interest rate swaps to be cleared by market participants through a

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U.S. Derivatives: SEC & FINRA

U.S. DERIVATIVES DEVELOPMENTS:

SEC AND FINRA

registered DCO or a DCO that has been exempted from registration under the CEA. The final rule harmonizes the CFTC’s clearing requirement with those finalized in Australia (except that forward rate agreements denominated in Australian dollars will not be subject to the CFTC’s clearing requirement), Canada, the EU, Hong Kong, Mexico and Singapore by extending the CFTC’s existing clearing mandate to certain classes of interest rate swaps denominated in various new currencies. Compliance with the expanded interest rate swap clearing requirements will be phased in over a two-year time period linked to when the analogous clearing requirements have become or will be effective in the relevant non-U.S. jurisdiction, beginning for some interest rate swaps 60 days after publication of the final rule in the Federal Register.

A copy of the final rule is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-10-14/pdf/2016-23983.pdf.

SEC Adopts New Rules and Amendments to Regulation SBSR

On July 14, 2016, the SEC issued a final rule adopting amendments to, and issuing guidance on, Regulation SBSR (Reg. SBSR) regarding the regulatory reporting and public dissemination of security-based swap transaction data (the SBSR Rule). Among other things, the amendments and guidance: (i) assign reporting duties for platform-executed security-based swaps that will be submitted to clearing; (ii) establish regulatory reporting and public dissemination requirements for certain cross-border security-based swaps; and (iii) prohibit registered security-based SDRs from imposing fees or usage restrictions on the security-based swap transaction data that they are required to disseminate.

Regarding the assignment of reporting duties, a national securities exchange or security-based SEF is generally required to report a security-based swap executed on the platform that will be submitted to clearing. A registered clearing agency is required to report any security-based swap to which it is a direct counterparty. With respect to cross-border transactions, a security-based swap is subject to the reporting and public dissemination requirements if it is entered between non-U.S. persons but the transaction is executed on a platform having its principal place of business in the United States.

The SBSR Rule also provides guidance regarding the application of Reg. SBSR to prime brokerage arrangements, which may result in two or three security-based swap transactions that are each subject to the reporting and public dissemination requirements. Security-based SDRs are required to attach a condition flag to such multi-leg transactions to avoid a misunderstanding that they are independent of one another.

In addition, the SEC established a new compliance date schedule for most of the rules under Reg. SBSR. Separate compliance dates exist for: (i) reporting obligations for newly executed security-based swaps; (ii) public dissemination of security-based swap information by security-based SDRs; and (iii) reporting obligations for historical security-based swaps. The earliest compliance date is for newly executed security-based swap and is the first Monday following the later of: (i) six months after the date on which the first security-based SDR that can accept transaction reports in an security-based swap asset class (i.e., equity or credit) registers with the SEC; or (ii) one month after the security-based swap entities, registration compliance date, which is itself tied to the completion of a number of related rule-makings.

The SBSR Rule is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-08-12/pdf/2016-17032.pdf.

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Other Developments

U.S. DERIVATIVES: OTHER DEVELOPMENTS

SEC Adopts Amendments Providing Authorities Access to Data Obtained by Security-Based Swap Data Repositories

On August 29, 2016, the SEC adopted amendments to Rule 13n-4, governing the duties and core principles of security-based SDRs, that would require security-based SDRs to make data available to regulators and other authorities. The SEC will be able to, upon request, share nonpublic data and information from a security-based SDR in its possession, with, among others, any federal, state, local or foreign government, and any other person that the SEC determines to be appropriate. However, providing such information to other entities is conditioned upon the SEC and the entity with which the information will be shared having a memorandum of understanding or similar arrangement to address the confidentiality of the security-based swap information. The adopted amendments became effective on November 2, 2016.

The final rule is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-09-02/pdf/2016-21137.pdf.

Treasury’s Financial Crimes Enforcement Network Publishes FAQ on Customer Due Diligence Requirements for Futures Commission Merchants, Introducing Brokers and Other Financial Institutions

On July 19, 2016, FinCEN published guidance in the form of frequently asked questions and related answers (the CDD FAQ) regarding its customer due diligence requirements rule (the CDD Rule). The CDD Rule came into effect on July 11, 2016, and compliance will be required no later than May 11, 2018. The CDD Rule requires certain financial institutions, including FCMs and IBs for commodities, to establish and maintain written procedures that are reasonably designed to identify, verify and record the identity of beneficial owners of their legal entity customers. As explained in the CDD FAQ, which is intended to assist covered financial institutions in understanding the scope of their CDD Rule requirements, these procedures must: (i) enable the institution to identify the beneficial owners of each customer at the time a new account is opened, unless the customer is otherwise excluded or the account is exempted; (ii) establish risk-based practices for verifying the identity of each beneficial owner identified by the covered financial institution, to the extent reasonable and practicable; and (iii) contain the elements required for verifying the identity of customers that are individuals under applicable customer identification program requirements. The CDD Rule also requires covered financial institutions to adopt anti-money laundering programs that include appropriate risk-based procedures for conducting ongoing customer due diligence, including understanding the nature and purpose of the customer relationship and conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

A copy of the CDD FAQ is available at: https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.

A copy of the CDD Rule is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.

A Sidley Update regarding the CDD Rule is available at: http://www.sidley.com/news/2016-05-19-banking-and-financial-services-update.

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U.S. Enforcement

Prudential Regulators Finalize Rule Exempting Certain End Users From Initial and Variation Margin Requirements

On August 2, 2016, the Federal Reserve Board, FDIC, Office of the Controller of the Currency, Financial Conduct Authority and Federal Housing Finance Agency (the Prudential Regulators) published final rules exempting certain commercial and financial end users from initial and variation margin requirements for certain non-cleared swaps (the PR End User Margin Exemption). The PR End User Margin Exemption implements the relief provided to certain commercial and financial end users under Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015. The Prudential Regulators had previously adopted an interim version of the PR End User Margin Exemption at the same time the Prudential Regulators adopted final margin requirements for non-cleared swaps (the PR Margin Rules).

The PR End User Margin Exemption provides that the initial and variation margin requirements under the PR Margin Rules will not apply to a non-cleared swap if one of the counterparties to the non-cleared swap qualifies for certain exceptions from clearing under the CEA or the Securities Exchange Act of 1934, including the commercial end user exception under section 2(h)(7)(A) of the CEA and the exception for treasury affiliates of commercial end users under section 2(h)(7)(D) of the CEA.

A copy of the PR End User Margin Exemption is available at: https://www.gpo.gov/fdsys/pkg/FR-2016-08-02/pdf/2016-18193.pdf.

A Sidley Update on the PR Margin Rules is available at: http://www.sidley.com/news/2016-01-20-derivatives-update.

ISDA Publishes 2016 Variation Margin Protocol

On August 16, 2016, ISDA published the 2016 Variation Margin Protocol (the VM Protocol). The VM Protocol is intended to facilitate market-wide compliance with uncleared swap variation margin requirements that are set to apply to uncleared swaps entered into on or after March 1, 2017. The VM Protocol allows counterparties to make changes to existing Credit Support Annexes (CSAs) or to create new CSAs that are in compliance with the variation margin requirements applicable to the uncleared swap counterparties. In order to complete the amendment process, parties will need to exchange and match questionnaires under the terms of the VM Protocol.

A copy of the 2016 Variation Margin Protocol documentation is available at: http://www2.isda.org/functional-areas/wgmr-implementation/isda-2016-variation-margin-protocol/.

CFTC Enforcement Settlement With Swap Dealer for Reporting Errors

On July 6, 2016, the CFTC issued an order settling charges against Barclay’s Bank PLC (Barclays), a registered swap dealer, in connection with the failure to keep accurate records and the filing of inaccurate large trader reports for swap positions in energy and agricultural commodities. Barclay’s detected and self-reported the errors in 2014, and provided some corrections. Certain information could not be corrected, however, due to the inadvertent deletion of some of the underlying data. Some of the incorrect information came from external vendors. Barclays settled the enforcement action without admitting or denying the CFTC’s findings or conclusions and consented to pay a $560,000 civil monetary penalty.

A copy of the order is available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder070616.pdf.

U.S. ENFORCEMENT DEVELOPMENTS

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European Derivatives

Public Comment Sought by CFTC on Proposed Whistleblower Rule Amendments

On September 1, 2016, the CFTC requested public comment on proposed amendments to the whistleblower rules found in Part 165 of the CFTC’s Regulations. The proposed amendments are in part intended to strengthen the CFTC’s protection of whistleblowers from retaliation. In 2011, the CFTC concluded that it lacked the statutory authority to bring an enforcement action against persons who retaliate against whistleblowers. The CFTC has now reconsidered its position and proposed to amend its rules to provide that a violation of the anti-retaliation provisions is enforceable in an action or proceeding brought by the CFTC. Comments were required to be submitted on or before September 29, 2016.

A copy of the proposed amendments is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-20745a.pdf.

CFTC Action Against Customer for Recordkeeping Violations

On September 22, 2016, the CFTC issued an enforcement order against Barclays Bank PLC, in its capacity as a customer of an FCM, for failing to maintain and produce to the CFTC confirmations for thousands of energy and metals “Exchange for Related Positions” covering the period of 2009-2012, in violation of CFTC Regulations 1.31(a)(2) and 1.35 (a-2)(2) (replaced by 1.35(c)(2)).

A copy of the order is available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder092216.pdf.

CFTC Ramps Up Reporting and Recordkeeping Enforcement Actions

In the third quarter of 2016, the CFTC’s Division of Enforcement initiated multiple enforcement actions for alleged violations of various CFTC reporting and recordkeeping rules. Specifically, the CFTC initiated orders and simultaneously settled charges with two large financial institutions relating to alleged violations of the CFTC’s Part 20 large trader reporting rules. These financial institutions were required to pay mid six-figure civil penalties and cease and desist from further violations. The CFTC also continued to enforce its Parts 43 and 45 swap reporting rules, filing a complaint against a large financial institution for, among other things, allegedly failing to report swap data for multiple days and submitting incomplete and untimely swap data. Lastly, the CFTC issued orders and settled charges against multiple non-U.S. commodity companies for failing to report certain soybean oil and cotton futures contracts, as required under the CFTC’s Regulations. The level of enforcement activity during Q3 2016 in the reporting and recordkeeping space suggests the CFTC’s resolve to enhance its market data and surveillance and to do so, at least in part, by aggressively pursuing alleged rule violations in this area.

European Commission Implementing Decision on the Equivalence of U.S. Designated Contract Markets

On July 2, 2016, the EC issued an Implementing Decision on the equivalence of U.S. DCMs. The Implementing Decision provides that boards of trade designated by the CFTC as contract markets are “equivalent” to EU regulated markets. This decision means, among other things, that derivatives executed on such DCMs will not be treated as “OTC” derivatives for the purposes of EMIR and will not, therefore, be subject to the EMIR mandatory clearing obligation nor counted towards the EMIR clearing threshold applying to non-financial counterparties.

EUROPEAN DERIVATIVES DEVELOPMENTS

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European Derivatives

Among the list of DCMs declared equivalent by the European Commission are the CME, Nasdaq Futures, Inc. and ICE Futures U.S., Inc.

The Implementing Decision containing a full list of DCMs declared equivalent is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016D1073&from=EN.

Delay to Mandatory Clearing for Financial Counterparties With a Limited Volume of Activity

On July 13, 2016, ESMA published a consultation paper consulting on a possible delay to the phase-in period for the EMIR clearing obligation for financial counterparties with a limited volume of activity in order to help them mitigate the difficulties they face in relation to clearing through CCPs.

ESMA proposes delaying the phase-in date by two years and expects to publish a final report on the matter, including draft technical standards, in Q4 2016.

The consultation paper is available at: https://www.esma.europa.eu/sites/default/files/library/2016-1125_cp_on_clearing_obligation_for_financial_counterparties.pdf.

Mandatory Clearing for Interest Rate Swaps Denominated in Non-G4 Currencies

On June 10, 2016, RTS effecting a mandatory clearing obligation for certain types of interest rate swaps denominated in non-G4 currencies under EMIR (the Non-G4 IRS RTS), entered into force. The dates from which the clearing obligation takes effect will depend on the categorization of each counterparty.

The Non-G4 IRS RTS relate specifically to interest rate swaps denominated in Norwegian Krone, Polish Zloty and Swedish Krona.

On July 20, 2016, ESMA published a further delegated regulation amending the Non-G4 IRS RTS (the Amendment). Among other things, the Amendment corrects an error in the clearing start date for certain categories of counterparty.

The full text of the Non-G4 IRS RTS is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1178&from=EN.

The Amendment is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1178R(01)&from=EN.

European Banking Authority Publishes Interim Report on Minimum Requirement for Own Funds and Eligible Liabilities

On July 19, 2016, the European Banking Authority (EBA) published its Interim Report (the Interim Report) on the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). The Interim Report concerns the EU’s approach to the implementation of Total Loss Absorbing Capacity (TLAC). In relation to Article 55 of the Bank Recovery and Resolution Directive (BRRD), which requires the contractual recognition of bail-in in certain non-EU law-governed agreements entered into with EU dealers, the EBA invited stakeholders to comment on “the practical difficulties faced in implementing the recognition clauses, specifically in the field of MREL, and on alternative approaches to improve the regime without creating incentives to evade the scope of bail-in.” In particular, the EBA mentioned the possibility of restricting the requirement to those liabilities which are eligible for MREL.

The EBA’s deadline for responses was August 30, 2016.

The Interim Report is available at: https://www.eba.europa.eu/documents/10180/1360107/EBA+Interim+report+on+MREL.

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European Derivatives

Financial Stability Board, Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures and International Organization of Securities Commissions Issue Progress Report on Central Counterparty Resilience, Recovery and Resolution

On August 16, 2016, the Financial Stability Board (FSB), BCBS, Committee on Payments and Market Infrastructures (CPMI) and IOSCO jointly published a progress report on their continued efforts to enhance the resilience, planning and resolution of CCPs (the Progress Report). The Progress Report sets forth their collective agenda for the coming months, including: (i) BCBS finalizing its revisions by the end of 2016, and calibrating its Basel III leverage ratio framework and publishing a follow-up report on central clearing incentives by the end of 2017; (ii) FSB proposing in early 2017 and finalizing by July 2017 more granular guidance on CCP resolution; and (iii) CPMI-IOSCO publishing in early 2017 more detailed guidance on the standards for CCP resilience and recovery, a draft framework for supervisory stress testing, findings from its study group’s analysis of the interdependencies of central clearing, and a targeted review of CCPs’ progress in addressing the most important resilience, recovery and resolution issues. On the same date, CPMI-IOSCO also published two reports on recovery and resolution. The first of these (the Assessment Report) looked at how certain CCPs are implementing the key elements of the principles for financial market infrastructures (PFMIs) regarding recovery and resolution and assessed their compliance, finding that these CCPs have made important and meaningful progress in implementing arrangements consistent with the PFMIs, with certain gaps in recovery planning and credit and liquidity risk management. CPMI-IOSCO’s second report (the Consultative Report) provides consultative guidance on the PFMIs’ requirements for recovery and resolution, reiterating that a CCP’s recovery plan should include tools that comprehensively and effectively address, among other things: (i) the allocation of losses not caused by participant default; (ii) the allocation of uncovered credit losses and liquidity shortfalls following participant defaults; (iii) the speed of replenishment of depleted financial resources; and (iv) the re-establishment of a matched book following a participant default. Comments were solicited and accepted until October 18, 2106.

The Progress Report is available at: http://www.fsb.org/wp-content/uploads/Progress-Report-on-the-CCP-Workplan.pdf.

The Assessment Report is available at: http://www.bis.org/cpmi/publ/d148.pdf.

The Consultative Report is available at: http://www.bis.org/cpmi/publ/d149.pdf.

ESMA Publishes Discussion Paper on the Trading Obligation Under Markets in Financial Instruments Regulation

On September 21, 2016, ESMA published a discussion paper on the trading obligation for derivatives under Markets in Financial Instruments Regulation (MiFIR).

The trading obligation will require certain liquid OTC derivatives to be traded on regulated trading venues (i.e., regulated markets, multilateral trading facilities and organized trading facilities). The paper discusses the date from which the trading obligation should take effect, and the treatment of package transactions and defines the sets of derivatives classes that will be assessed for the trading obligation.

ESMA is seeking views from industry participants on how to calibrate the trading obligation and responses must be submitted by November 21, 2016.

The discussion paper is available at: https://www.esma.europa.eu/file/19738/download?token=0IMYim00.

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Asia Derivatives

ASIA DERIVATIVES DEVELOPMENTS

ESMA Updates the List of Recognized Third-Country CCPs

On September 28, 2016, ESMA added ICE Clear Credit LLC (ICC) and the Minneapolis Grain Exchange Inc. (MGEX) to its list of third-country CCPs recognized to offer clearing services in the EU in accordance with EMIR. This recognition means that, while ICC and MGEX remain subject to the supervision of their home jurisdiction, market participants will be able to clear OTC derivative contracts through these CCPs and still be deemed compliant with the EMIR mandatory clearing obligation. Additionally, recognized third-country CCPs will benefit from better capital treatment once the enhanced capital requirements for non-qualifying CCPs comes into effect under the EU Capital Requirements Regulation.

The updated list of third-country CCPs recognized by ESMA is available at: https://www.esma.europa.eu/sites/default/files/library/third-country_ccps_recognised_under_emir.pdf.

China

China Relaxes Foreign Exchange Regulations on Domestic Securities Investment by RMB Qualified Foreign Institutional Investors

On September 5, 2016, the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) jointly published a Circular on Matters related to Domestic Securities Investment by RMB Qualified Foreign Institutional Investors (RQFIIs). The New RQFII rules described therein (the New RQFII Rules) primarily aim to reconcile the New RQFII Rules with the current rules with respect to matters concerning foreign exchange administration following the issuance of the Provisions on the Foreign Exchange Administration of the Securities Investment in the Mainland by Qualified Foreign Institutional Investors (New QFII Rules) by SAFE in February 2016. In line with the New QFII Rules, the New RQFII Rules amended the procedures through which RQFIIs obtain their investment quotas, changing from a regulatory regime, where approvals were required for all cases, to a regulatory regime where only record-filings are required for the basic quota, and approvals are necessary only if the basic quota is exceeded. The New RQFII Rules also shortened the length of the lockup period for the investment principal from one year to three months for non-open-ended funds.

The New RQFII Rules (in Chinese only) are available at: http://www.safe.gov.cn/wps/portal/!ut/p/c5/04SB8K8xLLM9MSSzPy8xBz9CP0os3gPZxdnX293QwML7zALA09P02Bnr1BvI2c_E_1wkA6zeGd3Rw8Tcx8DAwsTdwMDTxMnfz8P50BDA09jiLwBDuBooO_nkZ-bql-QnZ3m6KioCACk6Xh-/dl3/d3/L2dJQSEvUUt3QS9ZQnZ3LzZfSENEQ01LRzEwODRJQzBJSUpRRUpKSDEySTI!/?WCM_GLOBAL_CONTEXT=/wps/wcm/connect/safe_web_store/safe_web/zcfg/zbxmwhgl/jwrzyyjzjgl/node_zcfg_zbxm_kjzwtz_store/066884804e1f9eb59398f3cdfa8ffa68.

Hong Kong

Hong Kong Securities and Futures Commission and Hong Kong Monetary Authority Release Further Consultation Conclusions on the Introduction of Mandatory Clearing and Expansion of Mandatory Reporting for OTC Derivatives

On July 15, 2016, the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) published “further conclusions” on proposals to introduce mandatory clearing and expand mandatory reporting for the second stage of the OTC derivatives regime. This is a further response to the original consultation paper issued on September 30, 2015, and the first conclusions paper and further consultation issued on February 5, 2016.

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Asia Derivatives

After gathering the views of market participants, the further conclusions set out revised proposals on several technical aspects. Highlights include:

■ Removal of the requirement to submit PDF files when reporting transactions; ■ Further clarification and guidance on completing specific data fields; and ■ Acceptance of internal code references (in place of other counterparty identifying particulars) when reporting transactions involving individuals.

A revised version of data fields to be completed under the new reporting regime, as well as a revised list of entities that will be classified as financial services providers for the purposes of mandatory clearing, are also included.

Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR69.

Hong Kong Exchanges and Clearing Limited Successfully Launches Closing Auction Session for its Securities Market

On July 25, 2016, Hong Kong Exchanges and Clearing Limited (HKEx) successfully introduced its first securities Closing Auction Session (CAS). On the first day, 282 stocks were traded in the CAS by 290 participants, contributing 2.2 percent of the full-day turnover.

During a CAS, market participants may input buy and sell orders, where the closing price is determined by the price with the highest volume of tender. All orders will then be executed at that price. To curb excessive price movements during the CAS, there is a two-stage price limit, initially at plus or minus five percent from the reference price and then between the best bid and best ask.

The market close for CAS securities is between 4:08 p.m. and 4:10 p.m., while it is 4:00 p.m. for other securities. For HKEx’s derivatives market, the closing time for trading of stock index futures and options, currency futures and commodities futures has been extended from 4:15 p.m. to 4:30 p.m. on a normal trading day, except on the last trading day of the month.

Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/160725news.htm.

Hong Kong Exchanges and Clearing Limited to Offer Mini H-shares Index Options and to Make Other Derivative Market Changes

On August 8, 2016, Hong Kong Exchanges and Clearing Limited (HKEx) announced the following changes:

Mini H-shares Index Options

On September 5, 2016, the HKEx will introduce the Mini-Hang Seng China Enterprises Index Options (Mini H-shares Index Options). This is to meet the demand from retail investors and to give market participants greater flexibility by providing a contract that is one-fifth the size of its H-shares Index Options contract. The HKEx has already invited applications for market makers for the new product.

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Fourth Calendar Month Contract

Commencing November 2016, HKEx will offer a “fourth calendar month contract” for its H-shares Index Options and HSI Options. It is designed to facilitate trading close to a three-month maturity. For example, for the month of November 2016, the fourth calendar expiry month refers to options contracts with expiration in February 2017.

Primary Market Maker Program

On November 1, 2016, changes to the stock index options and stock options markets will be implemented. A Primary Market Maker program in the H-shares Index Options and HSI Options markets will be introduced. In addition, changes will be made to market makers’ obligations, covering their obligations to provide continuous quotes and to respond to quote requests regarding stock index options and stock options.

Information on key features of these changes is available at: http://www.hkex.com.hk/eng/market/partcir/hkfe/2016/Documents/MKD_EQD_07_16_e.pdf; and http://www.hkex.com.hk/eng/market/partcir/sehk/2016/Documents/MKD_EQD_08_16_e.pdf.

Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/160808news.htm.

OTC Clearing Hong Kong Limited Launches Clearing Services for USD/CNH Cross Currency Swaps

On August 15, 2016, OTC Clearing Hong Kong Limited (OTC Clear), a subsidiary of the Hong Kong Exchanges and Clearing Limited that provides clearing and settlement services for OTC derivatives transactions, announced the launch of its clearing services for cross currency swaps (CCS). At the initial stage, OTC Clear will provide clearing for swaps in the U.S. Dollar/Offshore RMB (USD/CNH) currency pair. OTC Clear will be the first of its kind, internationally, to provide clearing for USD/CNH CCS.

OTC Clear provides a Payment versus Payment (PvP) settlement solution through the Real-Time Gross Settlement system operated by the Hong Kong Monetary Authority, which eliminates settlement risk. OTC Clear has appointed Industrial and Commercial Bank of China (Asia) Limited and Standard Chartered Bank (Hong Kong) Limited as the settlement banks to conduct PvP settlement.

All trades are submitted to OTC Clear via MarkitSERV, a trade affirmation platform operated by IHS Markit, which provides trade processing services for the OTC derivatives and foreign currency markets. Some of the trades are being conducted through a Hong Kong broker, Tradition (Asia) Ltd.

The total aggregate notional value of US$120 million was cleared as of 4:00 p.m. on the first day.

Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/160815news.htm; and http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/1607212news.htm.

Regulators Announce the Approval of the Shenzhen-Hong Kong Stock Connect and the Abolishment of the Aggregate Quota Under the Shanghai-Hong Kong Stock Connect

On August 16, 2016, the Hong Kong Securities and Futures Commission (SFC) and China Securities and Regulatory Commission (CSRC) announced the approval, in principle, of the structure of the Shenzhen-Hong Kong Stock Connect scheme, which will provide mutual stock market access between Hong Kong and Shenzhen, as follows:

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■ Shares eligible under the northbound trading link: shares listed on the Shenzhen Stock Exchange (SZSE) issued by companies which have also issued H-shares; and constituent stocks of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index which has a market capitalization of not less than RMB¥6 billion.

■ Shares eligible under the southbound trading link: shares listed on The Stock Exchange of Hong Kong Limited (SEHK) issued by companies which also have issued A-shares; constituent stocks of the Hang Seng Composite LargeCap Index and Hang Sang Composite MidCap Index; and any constituent stock of the Hang Seng Composite SmallCap Index which has a market capitalization of not less than HK$5 billion.

The launch of the Shenzhen-Hong Kong Stock Connect is subject to the finalization of all necessary regulatory approvals, market readiness and relevant operational arrangements. The official launch will be announced by the regulators in due course.

On the same day, the SFC and China Securities and Regulatory Commission also abolished the aggregate quota, which refers to the maximum cross-boundary investment amount that investors in one market can make in the other market, under the Shanghai-Hong Kong Stock Connect with immediate effect.

Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR81; http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR80; http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/1608162news.htm; and http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/Documents/160816news.pdf.

Hong Kong Exchanges and Clearing Limited to Introduce Volatility Control Mechanism for its Securities Market

On August 18, 2016, the Hong Kong Exchanges and Clearing Limited (HKEx) announced its proposal to introduce a Volatility Control Mechanism (VCM) on August 22, 2016, a measure designed to prevent extreme price volatility arising from major trading errors and other unusual incidents in Hong Kong’s securities market.

This proposal is a response to the G20 and the IOSCO’s guidance on implementing control mechanisms in trading venues to deal with systemic risks arising from volatile market situations.

According to the HKEx, the VCM is a simple and “light-touch” model that aims to protect investors while minimizing trading interruption. It is not intended to limit the volatility of stock prices due to fundamentals, and should not be seen as a trading halt mechanism or daily price limit, as used in other markets.

Key features of the VCM:

■ Only applied at the individual security level to constituents of the Hang Seng Index (HSI) and Hang Seng China Enterprise Index (H-shares Index) (currently containing 81 securities);

■ An attempt to trade a security covered by the VCM at a price more than 10 percent away from its last traded price five minutes earlier will trigger a cooling-off period of five minutes where trading of the security can continue but within a band;

■ Maximum of one trigger per security in each of the two (morning and afternoon) trading sessions; and

■ To allow free price discovery, the cooling-off period does not apply in the opening and closing auctions, the first 15 minutes of the morning and afternoon trading sessions and the last 15 minutes of the afternoon session.

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The VCM is scheduled to be rolled out in HKEx’s derivatives market in the fourth quarter of this year.

Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/160818news.htm.

Hong Kong Securities and Futures Commission Designates Central Counterparties for OTC Derivative Transactions

On August 31, 2016, the Hong Kong Securities and Futures Commission (SFC) designated four central counterparties for the purpose of the mandatory clearing obligations for certain OTC derivatives. Under the Hong Kong Securities and Futures Ordinance (SFO) and its subsidiary legislation, certain OTC derivative transactions must be centrally cleared through a central counterparty designated by the SFC. The four designated central counterparties are:

■ CME ■ Japan Securities Clearing Corporation ■ LCH.Clearnet Limited ■ OTC Clearing Hong Kong Limited

The designations will create a variety of choices for market participants who are subject to mandatory clearing under the laws of Hong Kong. These designations have been effective since September 1, 2016.

Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR86.

Consultation Conclusions Not Yet Released for “Non-Centrally Cleared OTC Derivatives Transactions – Margin And Other Risk Mitigation Standards”

No consultation conclusions have been released as of September 1, 2016 regarding the consultation paper issued by the Hong Kong Monetary Authority (HKMA) on December 3, 2015, which sets out the proposed margin requirements for non-centrally cleared OTC derivatives (the Consultation Paper).

The Consultation Paper contained a draft module for the HKMA’s Supervisory Policy Manual to introduce margin requirements for non-centrally cleared OTC derivatives transactions for authorized institutions regulated in Hong Kong. This was prepared as a response to the global minimum standards jointly issued by the BCBS and the IOSCO.

The proposal included the requirements for derivatives market participants to exchange initial margin and variation margin, commencing September 1, 2016. However, the consultation process is still underway. The definitive implementation date has yet to be confirmed by the HKMA.

Further information is available at: http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-14.pdf; and http://www.hkma.gov.hk/eng/key-functions/banking-stability/supervisory-policy-manual.shtml.

Hong Kong Exchanges and Clearing Limited and Authority of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone Sign Memorandum of Understanding

On September 6, 2016, the Hong Kong Exchanges and Clearing Limited (HKEx) and the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai Zone) signed a Memorandum of Understanding (MOU) to explore potential areas of cooperation in relation to their respective financial services industries.

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It has been HKEx’s aim to develop a spot commodities trading market with Mainland China backed by physical delivery and a warehouse system that is well-regulated, transparent and reliable. Further to the development of the Qianhai Zone, which was created to foster innovation in areas of permissible co-operation between China and Hong Kong, this MOU marks an important milestone in the efforts of the authorities in both cities to advance their spot commodities initiatives and further cooperation between their financial services industries.

Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/2016/160906news.htm.

Hong Kong Securities and Futures Commission Proposes to Ease Derivative Position Limits

On September 20, 2016, the Hong Kong Securities and Futures Commission (SFC) launched a consultation that proposes to enhance the position limit regime by expanding its scope and making it more responsive to financial developments.

Under the current regime, an exchange participant may seek authorization from the SFC to hold or control Hang Seng Index (HSI) and Hang Seng China Enterprise Index (H-shares Index) futures and options contracts, in excess of the statutory position limit, for the purpose of hedging risks that arise in the course of providing services to clients. Under the proposed regime, the cap on the excess that is allowable will be increased from the current 50 percent to 300 percent of the statutory position limit. The statutory position limit for stock options contracts will also be tripled from 50,000 to 150,000.

In addition, the SFC is proposing new excess position limits for index arbitrage activities, asset managers and market makers of exchange-traded funds.

The SFC will accept comments on the proposal from the public until November 21, 2016.

Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR93; and http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=16CP3.

Singapore

Monetary Authority of Singapore Responds to Feedback on Proposed Amendments to Certain Securities and Futures Regulations

On August 5, 2016, the Monetary Authority of Singapore (MAS) issued its response (the Response) to feedback on its paper entitled “Consultation on Amendments to Securities and Futures (Exemption from Requirement to Hold Capital Markets Services License) Regulations” issued on April 24, 2015 (the Consultation Paper).

In the Consultation Paper, the MAS proposed to exempt a remote clearing member from the requirement to obtain a capital markets services license for trading in futures contracts provided that certain conditions were fulfilled. In the Response, the MAS indicated that it will tighten the conditions to the licensing exemption such that a financial institution which has an affiliate carrying on business in providing financial services in Singapore would not qualify for the exemption and would not be eligible as a remote clearing member of a Singapore-based CCP. MAS indicated that this is in line with its objective to grow the liquidity on Singapore-based CCPs by admitting remote clearing members, rather than hollow out local clearing membership and have it substituted by remote clearing membership.

The MAS also stated that Singapore-based CCPs will be allowed to admit only remote clearing members that are appropriately licensed in a jurisdiction that is comparable to Singapore’s

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regulatory regime for clearing members. The MAS expressed its intention to limit Singapore-based CCPs total clearing exposure to remote clearing members and impose additional capital requirements on Singapore-based CCPs with significant clearing exposure to remote clearing members.

A copy of the Response is available at: http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Response%20to%20Feedback%20Received%20on%20Amendments%20to%20Securities%20and%20Futures%20Exemption%20from%20Requirement%20to%20Hold%20Capital%20Markets%20Services%20Licence%20Regulations.pdf.

Monetary Authority of Singapore Issues Circular on Margin Requirements for Non-Centrally Cleared Derivatives

On August 22, 2016, the Monetary Authority of Singapore (MAS) issued a circular entitled “Margin Requirements for Non-Centrally Cleared Derivatives” (the Circular). This was a follow-up to the consultation proposals that the MAS issued on October 1, 2015 to implement margin requirements for non-centrally cleared OTC derivative trades, which would be phased in from September 1, 2016.

The MAS stated in the Circular that after taking into account cross-border coordination issues as well as the level of industry preparedness, it has decided to defer the implementation of the margin requirements for uncleared derivatives beyond September 1, 2016. This is to avoid unintended disruptions to financial markets and to allow more time for the industry in Singapore to implement the new requirements.

The MAS will continue to monitor progress in the implementation schedules of other major markets and will announce a revised phase-in schedule for Singapore in due course.

The Circular is available at: http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Securities%20Futures%20and%20Fund%20Management/Regulations%20Guidance%20and%20Licensing/Circulars/MPI%2001_2016%20Circular%20on%20Margin%20Requirements%20for%20Non%20Centrally%20Cleared%20Derivatives.pdf.

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Glossary

Abbreviation Definition

BaFin German Bundesanstalt für Finanzdienstleistungsaufsicht

BCBS Basel Committee on Banking Supervision

BHC Bank Holding Companies

Bundesbank Deutsche Bundesbank

CBOT Chicago Board of Trade

CCP Central Counterparty

CDS Credit Default Swaps

CFTC Commodity Futures Trading Commission

CEA Commodity Exchange Act

CME Chicago Mercantile Exchange, Inc.

CPO Commodity Pool Operator

CTA Commodity Trading Advisor

DCM Designated Contract Market

DCO Derivatives Clearing Organization

DCR Commodity Futures Trading Commission, Division of Clearing and Risk

DMO Commodity Futures Trading Commission, Division of Market Oversight

DSIO Commodity Futures Trading Commission, Division of Swap Dealer and Intermediary Oversight

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

DTCC Depository Trust & Clearing Corporation

EC European Commission

EEMAC Commodity Futures Trading Commission, Energy and Environmental Markets Advisory Committee

EMIR European Market Infrastructure Regulation

ESMA European Securities Market Authority

EU European Union

FBO Foreign Banking Organization

FCM Futures Commission Merchant

FDIC Federal Deposit Insurance Corporation

FinCEN U.S. Department of the Treasury, Financial Crimes Enforcement Network

FINRA Financial Industry Regulatory Authority, Inc.

IB Introducing Broker

IHC Intermediate Holding Company

IOSCO International Organization of Securities Commissions

ISDA International Swaps and Derivatives Association

MSP Major Swap Participant

GLOSSARY OF FREQUENTLY USED TERMS

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Abbreviation Definition

NFA National Futures Association

RIC Registered Investment Company

RTS Regulatory Technical Standards

SDR Swap Data Repository

SEC Securities and Exchange Commission

SEF Swap Execution Facility

SIDCO Systemically Important Derivatives Clearing Organization

TAC Commodity Futures Trading Commission, Technology Advisory Committee

GLOSSARY OF FREQUENTLY-USED TERMS

Glossary

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