Cross border guidance, extraterritoriality, and third country issues. Mutual recognition and substituted compliance.
In the OTC derivatives world, these terms have replaced old favorites like day count fractions, credit events and calculation periods as topics for discussion and debate.
Comments flooded into the CFTC from industry and regulator alike on the long-awaited CFTC guidance on the cross border application of its rules (as the Commission refers to them) or to third country issues related to extraterroriality (as Europe refers to them). Regulators are struggling over the mutual recognition of another country’s regulatory regime, or a system of substituted compliance, where one country’s rules can take the place of another’s in order to achieve compliance.
All this back-and-forth is driven by the 2012 year-end deadline to comply with the G20 commitment on clearing, execution, reporting and capital for OTC derivatives. Where do the US and Europe stand in achieving those goals? What are the differences between approaches? And how significant are those differences?
To assist our membership in understanding both the similarities and the differences, we have worked with the Clifford Chance law firm to produce a comparison of rulemaking on critical issues in both the United States and Europe. This is version 2.0, as we produced an earlier version almost two years ago. And with the regulations still evolving, don’t be surprised if there is a version 3.0.
What the comparison shows is that there is significant commonality in the approaches to issues in the United States and Europe.
But there are also some important differences. Treatment of end-users, the notion of major swap participant in the United States and the so-called “push out” rule are among those differences.
There are also differences in the timing of certain rules, driven largely by the fact that trade execution and pre- and post-trade transparency in Europe are part of the revisions to the Markets in Financial Instruments Directive (MiFiD), which is still working its way through the European process. We are not likely to have clarity on those issues until late this year or some time into 2013.
The comparison has a helpful summary chart indicating which rules (clearing, reporting, margin, capital, registration) apply to which entities (dealers, other financial counterparties, non-financial counterparties). From there, a reader can drill down to all the details.
As with any language, there are several levels of comprehension. One can learn the words, then the grammar, but true understanding comes when you know the subtle nuances of a native speaker. Think of the comparison we have produced with Clifford Chance as your Rosetta Stone for being able to be bilingual in the new world of derivativese.