September 25, 2013
CFTC Provides No-Action Relief for Market Participants
Complying with Certain Essentially Identical EMIR Risk
Mitigation Rules
Key Takeaways:
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The no-action relief has been provided to SD/MSPs facing both EMIR’s
and the CFTC’s regulations related to certain risk mitigation requirements
so that SD/MSPs complying with EMIR’s requirements for certain swap
transactions will be deemed compliant with certain CFTC requirements.
>
While the No-Action Letter’s relief is different than a substituted compliance
determination from the CFTC, the two are similar. Both allow a swap
transaction to comply with one regulatory regime’s requirements, but the
No-Action Letter’s relief is available to both U.S. and non-U.S. SD/MSPs,
while a substituted compliance determination would be helpful only to nonU.S. SD/MSPs (and, in certain circumstances, the non-U.S. branches of
U.S. SD/MSPs).
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The No-Action Relief does not have an expiration date.
Contents
Overview ........................... 1
Transactions Subject to NoAction Relief...................... 2
Substituted Compliance
Determination v. No-Action
Relief ................................. 3
Overview
The Commodity Futures Trading Commission’s (the “CFTC”) Division of Swap
Dealer and Intermediary Oversight (the “DSIO”) issued two letters over the
course of the summer related to the ability of U.S. and non-U.S. swap dealers
and major swap participants (“SD/MSPs”) to comply with the European Market
Infrastructure Regulation (“EMIR”) regarding risk mitigation techniques related to
non-cleared swap transactions (the “EMIR Risk Mitigation Rules”) in lieu of
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analogous CFTC requirements. In a July no-action letter (the “No-Action
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Letter”), the DSIO found that the EMIR Risk Mitigation Rules are “essentially
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See Article 11 of the Commission Delegated Regulation (EU) No. 149/2013 of 19 December 2012
supplementing Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4
July 2012 on OTC derivatives, central counterparties and trade repositories.
CFTC No-Action Letter 13-45 Corrected (July 11, 2013), available at:
http://www.cftc.gov/LawRegulation/CFTCStaffLetters/13-45. Because the SD/MSPs had to be in
compliance with the CFTC Risk Mitigations Rules by July 1, 2013, but the EMIR Risk Mitigation
Rules’ compliance date was September 15, 2013, other No-Action Letters were issued so as to
establish a common compliance date of September 15, 2013 for the applicable swap transactions.
CFTC Provides No-Action Relief for Market Participants Complying with Certain Essentially Identical
EMIR Risk Mitigation Rules
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identical” to regulations adopted by the CFTC in September 2012 regarding swap
documentation related to the timely and accurate confirmation, processing,
portfolio reconciliation, portfolio compression, dispute resolution and valuation of
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swaps. Due to their similarities, the DSIO determined that, for certain swap
transactions, an SD/MSP complying with the EMIR Risk Mitigation Rules would
be deemed to be compliant with the CFTC Risk Mitigation Rules.
Transactions Subject to No-Action Relief
The No-Action Letter’s relief covers (1) non-cleared swaps and (2) physicallysettled FX forward transactions and swap agreements exempted from the
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definition of “swap” by the U.S. Department of the Treasury. In order to be
eligible for the No-Action Letter’s relief, a transaction must be subject to both the
CFTC Risk Mitigation Rules and the EMIR Risk Mitigation Rules. Generally, this
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will encompass transactions between a U.S. person and a counterparty subject
to EMIR if at least one of the counterparties is a registered SD/MSP. It is also
possible for a transaction without a U.S. person to be subject to both sets of
regulations. For example, a transaction between an SD/MSP established in the
European Union and an entity the performance of which is guaranteed by a U.S.
person affiliate would be subject to both the CFTC Risk Mitigation Rules and the
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EMIR Risk Mitigation Rules.
An SD/MSP that claims relief under the No-Action Letter and complies with the
EMIR Risk Mitigation Rules must also fully comply with other CFTC swap
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documentation regulations that are otherwise applicable.
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See CFTC No-Action Letters 13-40 (June 27, 2013) and 13-50 (August 23, 2013), available at:
http://www.cftc.gov/LawRegulation/CFTCStaffLetters/No-ActionLetters/index.htm.
See 17 C.F.R. § 23.501 – 23.505.; see also Confirmation, Portfolio Reconciliation, Portfolio
Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and
Major Swap Participants, 77 Fed. Reg. 55904 (September 11, 2012), available at:
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-21414a.pdf. The
DSIO determined that CFTC Regulations §§ 23.501, 23.502 (other than 23.502(c)), 23.503,
23.504(b)(2) and 23.504(b)(4) (the “CFTC Risk Mitigation Rules”) were “essentially identical to
provisions set forth under Article 11 of EMIR and the related EMIR Regulatory Technical
Standards.”
See Linklaters LLP, U.S. Treasury Issues Final Determination Respecting FX Swaps and FX
Forwards Under the Commodity Exchange Act, as amended by the Dodd-Frank Act, available at
http://www.linklaters.com/pdfs/mkt/newyork/A15849436.pdf.
For more on the definition of “U.S. person” see Linklaters LLP, CFTC Issues Final Extraterritorial
Guidance Respecting Title VII of the Dodd-Frank Act and Provides Time-Limited Exemptive Relief
to Certain Non-U.S. Market Participants, available at
http://www.linklaters.com/pdfs/mkt/newyork/A16858592_CFTC%20ET%20Guidance.pdf.
See Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap
Regulations, 78 Fed. Reg. 45292, ____ (July 26, 2013), available at
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.
These requirements include § 23.502(c) (requiring reporting to the Commission of any swap
valuation dispute in excess of $20,000,000 (or its equivalent in any other currency)), § 23.504
(except for (b)(2) and (b)(4)), § 23.505 (end-user exception documentation), and § 23.506 (swap
processing and clearing).
CFTC Provides No-Action Relief for Market Participants Complying with Certain Essentially Identical
EMIR Risk Mitigation Rules
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Substituted Compliance Determination v. No-Action Relief
The No-Action Letter is different than a substituted compliance determination but
functionally achieves the same ends by allowing a swap transaction to comply
with a foreign jurisdiction’s requirements and at the same time be considered
compliant with the CFTC’s swap regulations. Substituted compliance
determinations will assist non-U.S. SD/MSPs (and, in certain circumstances, the
non-U.S. branches of U.S. SD/MSPs) with their swap transactions outside of the
United States in jurisdictions where the CFTC determines the foreign compliance
regime to be “comparable and comprehensive.” The relief provided for in the NoAction Letter required a finding that the two sets of regulations were “essentially
identical” (a seemingly more stringent standard than “comparable and
comprehensive”) and provided relief to both U.S. and non-U.S. SD/MSPs.
Alternative compliance options with respect to transaction-level requirements
such as reporting, trade execution and/or clearing requirements have not been
issued by the CFTC, but EMIR is further behind with respect to implementing
requirements analogous to those under CFTC regulations, and EU regulators
may not complete such implementation until 2014. Whether the CFTC will favor
substituted compliance determinations or provide additional/similar no-action
relief in the future is unclear, though CFTC Chairman Gary Gensler has stated
that the CFTC intends to make substituted compliance determinations before
December 21 of this year. The alternative compliance options completed this
year may only be with respect to entity-level requirements such as
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recordkeeping, capital, risk management and certain reporting requirements.
It should also be noted that the relief granted in the No-Action Letter is limited to
the CFTC Risk Mitigation Rules and does not include relief for all of the CFTC’s
swap documentation requirements applicable to SD/MSPs since July 1, 2013. As
such, an SD/MSP subject to jurisdiction both under EMIR’s and the CFTC’s
regulations will still require certain provisions in its swap relationship
documentation to be in compliance with CFTC requirements for which the DSIO
did not find “essentially identical” EMIR requirements. ISDA has published
numerous documents to assist market participants in updating their current swap
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agreements to comply with various regulatory requirements.
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“We are currently reviewing submissions for entity-level substituted compliance in six jurisdictions
(the European Union, Australia, Canada, Hong Kong, Japan and Switzerland). We’re consulting
closely with regulators in those jurisdictions and look forward to making determinations prior to
December 21 of this year.” Remarks of Chairman Gary Gensler before the ISDA European
Conference (September 19, 2013), complete transcript available at:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-145.
ISDA publications relevant to the CFTC Risk Mitigation Rules and EMIR Risk Mitigation Rules
include the March 2013 Dodd-Frank Protocol (the “March DF Protocol”), 2013 EMIR Port Rec,
Dispute Res and Disclosure Protocol (the “July EMIR Protocol”) and the DFP2 to EMIR Top Up
Agreement (the “Top Up Agreement”). The Top Up Agreement is available to market participants
that have adhered to the March DF Protocol and not the July EMIR Protocol. By agreeing to the
Top Up Agreement, the applicable parties’ March DF Protocol is amended, in part, to incorporate
EMIR’s Risk Mitigation Rules, facilitating compliance with the EMIR Risk Mitigation Rules without
CFTC Provides No-Action Relief for Market Participants Complying with Certain Essentially Identical
EMIR Risk Mitigation Rules
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Finally, although the DSIO has granted relief with respect to the CFTC Risk
Mitigation Rules, no similar relief has been granted yet under EMIR. EMIR
requires that the European Commission (“EC”) make an “equivalency”
determination with respect to the CFTC’s swap regulatory regime. If the EC finds
such regulatory regime “equivalent,” then the applicable swaps between an EU
counterparty and a U.S. person could be subject only to the CFTC’s swap
regulatory regime. The CFTC noted that the EC is expected to make a number of
equivalency determinations by the end of 2013.
adhering to the July EMIR Protocol. Copies of the March DF Protocol, July EMIR Protocol and Top
Up Agreement available at: http://www2.isda.org/.
CFTC Provides No-Action Relief for Market Participants Complying with Certain Essentially Identical
EMIR Risk Mitigation Rules
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CFTC Provides No-Action Relief for Market Participants Complying with Certain Essentially Identical
EMIR Risk Mitigation Rules
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