European Commission and CFTC Publish Announcement on EU/US Clearing Equivalence
The European Commission and the U.S. Commodity Futures Trading Commission (“CFTC”) announced a “common approach for transatlantic CCPs” on 10 February 2016. Under this “common approach,” the European Commission has pledged to shortly adopt an equivalence decision with respect to CFTC requirements for U.S. Central Clearing Parties. This significant decision has taken over three years to negotiate, and will allow the European Securities and Markets Authority ("ESMA") to recognize clearing with a CFTC-registered CCP as meeting the European Market Infrastructure Regulation ("EMIR") clearing requirements.
Conversely, CFTC staff will propose a “determination of comparability” which will provide a basis for EU CCPs to meet certain CFTC requirements through compliance with EMIR. A streamlined process for the registration of EU CCPs with the CFTC will also be proposed.
Crucially for European market participants, the European Commission and the CFTC anticipate that recognition of U.S. CCPs by ESMA will take place before the EMIR clearing requirement starts to take mandatory effect from June 21, 2016. While EMIR gives ESMA 180 working days to conclude the recognition process for U.S. CCPs, ESMA has stated that it “intends to do everything within its powers to shorten that period to the maximum extent.” It has also been announced that G4 currency interest rate derivatives that are subject to the “frontloading requirement” for certain parties from February 21, 2016 may now also be cleared in CFTC-registered U.S. CCPs, on the basis that such CCPs will be formally recognized by ESMA by the time the obligation to clear materializes.
While this is clearly a welcome development that goes some way to improving the regulatory situation for users of cross-border OTC derivatives, the issue of transaction reporting is notably absent. Industry bodies continue to lobby for a move to one-sided reporting under EMIR to improve the likelihood that regulators may reach an equivalence decision with respect to trade reporting on both sides of the Atlantic, and to remove the reporting burden from the buy-side. Indeed, the latest piece of European transaction reporting regulation, the Regulation on securities financing transactions and reuse (“SFTR”) explicitly requires that ESMA submit a report within 2 years of the entry into force of the SFTR which takes into account the appropriateness of single-sided reporting. Although it seems that regulators are aware of the potential to move to single sided reporting, the issue’s absence from the latest EU/CFTC communication is an indicator that we may be some way off from achieving this outcome.