March 16, 2016

CFTC Approves Substituted Compliance Framework in Follow-up to the Recent Equivalence Agreement between the US and the EU

Division Staff Simultaneously Provides Relief for DCOs/CCPs from Certain CFTC Regulations

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today unanimously approved a substituted compliance framework for dually-registered central counterparties (CCPs) located in the European Union (EU), together with a comparability determination with respect to certain EU rules. Today’s action follows the historic agreement between the CFTC and the European Commission regarding dually-registered derivatives clearing organizations (DCOs)/CCPs and represents a major step in paving the way for the EU’s recognition of U.S. CCPs. [See CFTC-EU Common Approach]

In the Notice of Comparability Determination for the European Union: Dually-Registered Derivatives Clearing Organizations and Central Counterparties (Determination) announced today, the CFTC determined that certain laws and regulations applicable in the EU provide a sufficient basis for an affirmative finding of comparability with respect to certain regulatory obligations applicable to DCOs that are registered with the CFTC and are authorized to operate as CCPs in the EU. The Determination will be published in the Federal Register and will be effective upon publication.

The Determination will allow the global derivatives market to continue to efficiently serve the many businesses that use it to hedge commercial risk by permitting EU CCPs already registered with the CFTC as DCOs (DCO/CCPs) and those seeking registration to provide services to US clearing members and clients while complying with certain corresponding EU requirements. The Determination reflects the CFTC’s efforts to ensure that CCPs on both sides of the Atlantic are held to high standards, thereby promoting financial stability.

The Determination follows extensive analysis by the CFTC’s and the EC’s staffs to understand whether differences in their regulatory regimes were significant. The Determination identifies those EMIR requirements that are comparable to the corresponding CFTC requirement(s) and comprehensive. By issuing this Determination, the CFTC further harmonizes the CFTC and EMIR regimes without risking regulatory arbitrage while also enhancing the protection of customers.

Simultaneously, the CFTC’s Division of Clearing and Risk (DCR) issued a no-action letter providing limited relief for DCO/CCPs from the application of CFTC regulations to discrete aspects of a DCO/CCP’s non-U.S. clearing activities.

Key Elements:

1. Substituted Compliance

As described in the Determination, the Commodity Exchange Act (CEA) and CFTC regulations require that foreign-based CCPs register with the CFTC in certain circumstances. If registered, they must comply with the relevant U.S. requirements, including the CFTC regulations applicable to registered DCOs. Based on the Determination, DCO/CCPs may comply with certain CFTC requirements for financial resources, risk management, settlement procedures, and default rules and procedures (as set forth in the Determination) by complying with corresponding requirements under EMIR.

The CFTC also is streamlining the registration process for DCO/CCPs wishing to register with it.

2. No-Action Relief

Consistent with the interests of comity and facilitating cross border regulatory coordination, DCR is issuing a no-action letter to provide limited and enumerated relief from the application of CFTC regulations to discrete aspects of a DCO/CCP’s non-U.S. clearing activities.

3. Next Steps

The CFTC staff and European authorities will continue to cooperate closely to ensure that the agreed approach is applied consistently and continues to be appropriate with respect to CFTC-registered US CCPs and EU CCPs.

Last Updated: March 16, 2016