In a new analysis that may have implications for the mutual recognition of U.S. and E.U. derivatives trading venues, the Managed Funds Association (MFA) found substantial similarities between the U.S. and E.U. derivatives trading and transparency regimes, but also several areas of material difference that should be looked at. MFA made recommendations to bring the two regimes closer together.
Cross-border recognition of trading venues. Under a recently announced "common approach," the CFTC and European Commission are working to assess equivalence between relevant Commodity Exchange Act (CEA) provisions and CFTC regulations and corresponding requirements under MiFID II, MIFIR, and the Market Abuse Regulation (MAR).
Equivalence would allow the E.U. to recognize CFTC-authorized swaps execution facilities (SEFs) and designated contract markets (DCMs) as eligible venues to execute derivatives transactions subject to the E.U. trading obligation. On the U.S. side, the CFTC could exempt E.U.-authorized multilateral trading facilities (MTFs) and organized trading facilities (OTFs) from the requirement to register as SEFs, rendering them eligible venues for purposes of complying with the CFTC trade execution requirement, as long as standards under CEA Section 5h(g) are met.
Substantial similarity. MFA believes the two regimes are aligned in many important areas, including:
- Straight-through processing requirements. The regimes have similar requirements for pre-trade credit checks, timing of submission to clearing, and treatment of transactions not accepted for clearing.
- mpartial/non-discriminatory access to trading venues. The regimes have similar requirements regarding impartial access to trading facilities, including prohibitions against requiring self-clearing memberships to join and requiring breakage agreements for cleared derivatives.
- Scope of products covered. The regimes have substantial overlap in instruments subject to the trading obligation and treatment of package transactions.
In other areas, MFA noted certain differences but thinks these are unlikely to be viewed as material enough to affect comparability/equivalence determinations. On the process for determining derivatives subject to a trading obligation, MFA said the CFTC may want to consider taking a more meaningful oversight role in the "Made Available to Trade (MAT)" determination process. Regarding disclosure of trading venue rulebooks, MFA said E.U. regulators should encourage MTFs/OTFs to disclose their rulebooks to market participants prior to the implementation of MiFID II.
Important differences. MFA identified certain significant differences that may merit closer attention as the common approach is implemented.
Regarding pre-trade transparency, the CFTC requires specific methods of execution for instruments subject to the trading obligation, while the E.U. has different pre-trade transparency requirements for different types of facilities and allows expansive waivers even for instruments subject to the trading obligation. MFA said the CFTC may want to allow more flexibility in method of execution, while ESMA should continue to evaluate its "transitional transparency calculations" and ensure it is using data that captures all trading activity in the market.
On post-trade transparency, MFA noted that the length of public reporting delays (15 minutes vs. four weeks) is a material difference between the two regimes. MFA recommended that ESMA consider limitations on the use of the extended deferral period of four weeks, particularly for transactions in derivatives subject to the trading obligation. Also, ESMA may want to consider capping notional amounts for large trades.
Finally, MFA observed that pre-arranged trading is explicitly prohibited in the CFTC regime, except for block trades which still must be executed pursuant to the rules of a SEF, but ESMA has indicated it is considering the legitimacy of prearranged trading, particularly for derivatives subject to the trading obligation. According to MFA, ESMA should confirm that prearranged trading is prohibited, except for truly "large in scale" transactions, which should still be executed pursuant to the rules of an MTF/OTF. To determine the appropriate size threshold, ESMA should revisit its transitional transparency calculations, said MFA.
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