OTC Derivatives–US/EU comparison EIFR, 18 December 2013

September 6th , 2013

Laurence Caron-Habib

Head of Public Affairs

2 12/16/2013

G-20 requirements on OTC derivatives

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. ”

Commitment on 4 principles at September 2009 G-20 Summit

Increase

transparency

Reduce

counterparty

credit risk

Reduce

operational risk

EMIR MIFID

Review

DFA

(TitleVII)

Locally

driven

initiatives

BCBS-IOSCO

§Margin requirements for non-centrally cleared OTC

§New capital requirements to cover exposure to CCPs

3 12/16/2013

New rules to be implemented

New requirements (by 31 Dec 2012)

For all OTC

derivatives

(+ listed in the EU)

For liquid and

standardised

enough OTC

products

For non-cleared

OTC products

Clearing obligation

Reporting obligation to a Trade Repositary

Execution on electronic platforms

Margin requirements

Risk mitigation techniques

Effective implementation will start to apply from Q1-13 and will continue until 2015

4 12/16/2013

EMIR and DFA – Similar but different…

The requirements are the same but rules may differ

Different scope in

terms of

Different timelines

US is globally more advanced in terms of implementation

On both sides rules are still to be finalised

Satisfy both sets of rules will be a challenge

Entities covered by the rules

Products submitted to the rules

Content of the rules

Extra-territoriality

Registration approach / substituted compliance

EU approach is based on equivalence and mutual recognition

5 12/16/2013

2012 2013 2014

16/08 July 13

Feb2013

Rules adoption

Risk mitigation

techniques for

bilateral OTC

Clearing

obligation

Reporting

obligation

Margin reqts for

bilateral OTC

EM

IR

Clearing

obligation

Reporting

obligation

Margin reqts for

bilateral OTC

DF

A

EMIR implementation

date

ESMA Final Report

EC endorse ESMA RTS and

ITS

30/09 19/12

Consultation reopened

Consultation closed

SDs/MSPs Starting date for

IRS/CDS

12/10

25/09 26/11

Earliest effective mandatory

clearing

Entry into force (20 days after publ. in

OJ)

ESMA authorisation of 6 TRs

Dispute Resolution, Portfolio Reconciliation, Portfolio Compression

End of consultation

period

Starting date for all products/asset

classes

Timely confirmation and Mark-to-market

valuation

Mar

Q3 2014

Nov/Dec 02/12

15 Mar

Final report

Deadline for CCP application

15/09

15Sept

Q2 2014 BCBS-IOSCO 2d consultation

period

Feb 15 Mar

Category 3 Category1 Category 2

SDs/MSPs Starting date for all

others

Non SDs/MSPs Starting date for all

products

11/03 10/06 09/09

10/01 10/04

ESAs consultation

Q4

End of consultation

period

BCBS-IOSCO final report

BCBS-IOSCO 2d consultation

period

Feb 15 Mar

CFTC final rules

Q4

General timeline (provisional)

6 12/16/2013

Extra-territoriality

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

• Equivalence principle at the jurisdiction level

• Mutual recognition

SA

ME

H

OW

EV

ER

…

…and rules differ on a number of aspects

• potential overlaps and duplication of rules

• uncertainty on which rules to be applied

• potential regulatory arbitrage….

7 12/16/2013

Extra-territoriality / DFA

•

•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

• 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)

Rules at this stage

What does it mean?

8 12/16/2013

Extra-territoriality / EMIR

• EMIR (Level 1)

• Art 4.1.a – Clearing obligation / Art 11.12 – Risk mitigation techniques

• Art 13.1.2 – 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

• 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 ?

Rules at this stage

What does it mean?

9 12/16/2013

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 2013

10 12/16/2013

Conclusions

§ 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?

In a few words…

Cross-border rules will be a key priority in 2014

11 12/16/2013

Appendix

EMIR provisions on extra-territoriality

Concrete examples

DFA – entity and transaction requirements

DFA – US person definition

Detailed comparison

12 12/16/2013

Different rules on market participants

SD MSP

End-

user Non

Financial

FC

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

13 12/16/2013

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

• Final rules on scope of products

issued by the CFTC and SEC in 2012

• 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

14 12/16/2013

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 11.12 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”

15 12/16/2013

Extraterritoriality Regulatory Framework – EMIR (2/2)

1512/16/2013

§ EMIR Article 13.1.2: 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.

16 12/16/2013

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

17 12/16/2013

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.

18 12/16/2013

Concrete case (1/3)

Non US SD

Ex: BNPP

Non US Person

Ex:

French Bank

Example 1 :

Entity Level requirements Transaction Level requirements

Subsituted compliance No

19 12/16/2013

Concrete case (2/3)

Non US Person

Ex: French Asset Owner such such as Cardif

Foreign branch of a US SD

Ex:

JPM Chase Ldn Branch

Example 2 :

Entity Level requirements Transaction Level requirements

Only apply to JPM Chase Ldn Category A: substituted compliance

Category B: No

20 12/16/2013

Concrete case (3/3)

Non US SD

Ex: BNPP

A non-US person that is a Guaranteed Affiliate or a Conduite

Ex:

JPM Securities Ltd

Example 3 :

Entity Level requirements Transaction Level requirements

Category 1: substituted compliance

Category 2 : apply to BNPP

Category A: substituted compliance

Category B: No

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