SEC TAKES ENFORCEMENT ACTION AGAINST COMPANY OFFERING COMPLEX DERIVATIVE PRODUCTS TO RETAIL INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/17/2015 12:05 PM EDT

The Securities and Exchange Commission announced an enforcement action against a company that illegally offered complex derivatives products to retail investors.

The Dodd-Frank Act implemented two key requirements for any security-based swaps offering to a retail investor who doesn’t meet the high standard of an “eligible contract participant” defined in the law.  A registration statement must be effective for the offering, and the contracts must be sold on a national securities exchange.  These requirements are intended to make financial information and other significant details about the offering fully transparent to retail investors, and limit the transactions to platforms subject to the highest level of regulation.

An SEC investigation found that Silicon Valley-based Sand Hill Exchange was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange and without the required registration statements in effect.  The violations were detected shortly after the offering process began, and with cooperation from the company the platform was shut down before any investor harm occurred.

Sand Hill agreed to settle the SEC’s charges.

“The Dodd-Frank Act prohibits security-based swaps from being offered in the darkness to retail investors, and we were able to act quickly before any losses materialized in this offering that occurred outside the proper regulatory framework,” said Reid A. Muoio, Deputy Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to scrutinize this space for companies circumventing the law to offer security-based swaps without the safeguards provided to retail investors.”

According to the SEC’s order instituting a settled administrative proceeding against Sand Hill and two individuals:

Sand Hill began as two Silicon Valley entrepreneurs creating an online business involving the valuation of private startup companies in the region along the lines of a fantasy sports league.  But Gerrit Hall and Elaine Ou changed their business model multiple times, and earlier this year Sand Hill evolved to invite web users to use real money to buy and sell contracts referencing pre-IPO companies and their value.

Sand Hill sought people to fund accounts using dollars or bitcoins.  Hall and Ou did not ask users about their financial holdings or limit the offering to users with any specific amount of assets.  In fact, they wrote on the Sand Hill website: “We accept everybody regardless of accreditation status.”  Hall and Ou intended to pay users who profited from their contracts.

Hall and Ou understood that they were buying and selling derivatives linked to the value of private companies, and Ou falsely claimed that they were in the process of seeking regulatory approval for Sand Hill’s contracts.

For about seven weeks, Sand Hill offered, bought, and sold contracts through the website in violation of the Dodd-Frank provisions that limit security-based swaps transactions with people who don’t meet the definition of an eligible contract participant.  Hall and Ou exaggerated Sand Hill’s trading, operations, controls, and financial backing.

Sand Hill, Hall, and Ou ceased offering and selling security-based swaps following inquiries from the SEC in early April.

The SEC’s order finds that Sand Hill, Hall, and Ou violated Section 5(e) of the Securities Act and Section 6(l) of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Sand Hill, Hall, and Ou agreed to cease and desist from committing or causing any future violations of the securities laws.  Sand Hill agreed to pay a $20,000 penalty.

The Complex Financial Instruments Unit will continue its scrutiny of the retail market for conduct that may violate the Dodd-Frank Act’s swaps provisions, including online competitions creatively monetizing what actually constitute security-based swaps transactions.  The SEC’s investigation of Sand Hill was conducted by Brent Mitchell and Creola Kelly, and the case was supervised by Michael Osnato and Mr. Muoio.  The investigation was assisted by Carol McGee and Andrew Bernstein of the Division of Trading and Markets as well as Amy Starr and Andrew Schoeffler of the Division of Corporation Finance.

VICE CHAIR FDIC MAKES COMMENTS ON CONGRESS ALLOWING TAXPAYER SUPPORTED DERIVATIVES TRADING BY BANKS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION
Speeches & Testimony
Statement from FDIC Vice Chairman Hoenig on Congressional moves to repeal swaps push-out requirements

In 2008 we learned the economic consequences of conducting derivatives trading in taxpayer-insured banks. Section 716 of Dodd-Frank is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks. It is illogical to repeal the 716 push out requirement. In fact, under 716, most derivatives -- almost 95% -- would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank. The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.

Derivatives that are pushed out by 716 are only removed from the taxpayer support and the accompanying subsidy of insured deposit funding -- they will continue to exist and to serve end users. In fact, most of these firms have broker-dealer affiliates where they can place these activities, but these affiliates are not as richly subsidized, which helps explain these firms' resistance to 716 push out.

CFTC COMMISSIONER O'MALIA'S ADDRESS ON DERIVATIVES MARKET

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Keynote Address by Commissioner Scott D. O’Malia, Derivatives 2014: A Market in Transition – A TabbForum Event

We Have the Power to Reverse the Negative Impacts of the Commission’s Rules on Market Structure

May 6, 2014

Thank you for the kind introduction and for the opportunity to serve as your closing keynote speaker. It is my pleasure to engage with you here today and discuss market structure changes. Also, thank you to Larry Tabb and his great staff who contribute to this debate with opinions and research on a daily basis. It is my pleasure to have Larry Tabb contribute to the Technology Advisory Committee (“TAC”) work and in particular the high-frequency trading (“HFT”) discussion. I would also like to remind everyone that today is the fourth anniversary of the Flash Crash so it is particularly apt that we discuss evolving market structure at this conference.

Now that the final framework for derivatives regulation in the United States (“U.S.”) is largely in place, we have been witnessing some negative impacts on market structure of the Commission’s rules. Some people criticize the Commission for promulgating rules too fast and without taking the time to anticipate the impacts of its rules. I do not disagree with this assessment and, in fact, have made the same argument. As evidence, in the past three years, the Commission has finalized 68 rules and has issued 188 – that’s right 188 – staff no-action letters, staff guidance, and advisories to correct unintended consequences of its rules.

Last week, there was a funny headline in Risk.net that read “Scott O’Malia, It’s Your Fault.”1 This eye-catching story builds on some thorough reporting by Risk.net reporter Peter Madigan, who found that the Commission’s cross-border guidance has led to serious liquidity fragmentation between U.S. and European traders, who are doing everything possible to avoid getting caught up in the jurisdictional web of the Commission’s guidance.2 The story quotes me as saying that if the Commission’s rules contributed to such fracturing of liquidity, “…it means we have screwed up in the regulation somewhere.”3 While I did not vote for the onerous cross-border guidance, I am committed to fixing the guidance and every other rule that has cast the regulatory net too broadly or resulted in an outcome that has missed the mark.

In keeping with the spirit of today’s conference, I will focus on three topics that have contributed to changes in the derivatives market structure and discuss ways for the Commission to fix the negative impacts of its rules. First, I will address the recent HFT debate and provide a preview of the next TAC meeting, which will take this debate head-on as it relates to the derivatives market. Next, I will discuss the importance for regulators to refocus our efforts on outstanding cross-border harmonization issues so that liquidity fragmentation in the swaps market does not become permanent. Finally, I will discuss the Commission’s regulatory path forward, including the necessity to fix unworkable rules that have negatively impacted market structure.

High-Frequency Trading: The Next TAC Meeting Will Answer the Charges in Lewis’s Book Flash Boys

Michael Lewis’s book Flash Boys has stirred up quite a debate about HFT and market structure over the last month. The book claims that the stock market is “rigged” by HFTs that are front-running other traders’ orders. The book raises other concerning issues, such as HFTs having faster data feeds than other traders, exchanges paying brokers to take or provide liquidity, and HFTs co-locating within the exchanges. Although Flash Boys focuses on the equity market, several charges in the book could apply to the derivatives market. By CME Group’s own admission, HFTs account for about 30 percent of its trading volumes.4

HFT and automated trading is not a new topic for the TAC. The TAC has focused on this issue since I reconstituted it in July 2010, and since then, 9 out of 11 TAC meetings have focused on some element of automated trading. As Chairman of the TAC, I also established the Subcommittee on Automated and High Frequency Trading in 2012. The TAC has committed significant time and resources to better understand automated markets and their evolving structures. We will do so again at the next TAC meeting.

TAC Panel I: Answering the Charges Against HFT

As Securities and Exchange Commission (“SEC”) Chair Mary Jo White said about the equities market, I do not believe that our markets are rigged.5 At the next TAC meeting on June 3rd, I plan to have the first panel focus on HFT and respond to the charges in Lewis’s book from a derivatives market perspective to validate my belief. We will have an in depth discussion of data feeds, pricing, co-location, direct market access, order cancellation policies, among other issues and ask whether the right protections are in place. We will also discuss how these issues may impact the swaps market with its horizontally-integrated nascent swap execution facilities (“SEFs”). HFTs and non-HFTs will also provide their perspectives. I expect a robust discussion of these issues given the fire that Flash Boys has reignited around HFT.

I am committed to using TAC resources to continue examining the issues surrounding automated trading so that the Commission has all the facts and information before taking regulatory action to improve market structure, if necessary. The TAC first discussed risk controls and system safeguards back in 2010, and has continued to discuss these issues in subsequent meetings. These discussions directly contributed to the Commission’s Concept Release on Risk Controls and System Safeguards for Automated Trading Environments that was published last September.6 The concept release is a good start and asked over 120 questions in an attempt to further benefit from industry knowledge about automated trading.

I understand that Commission staff is starting to work on a proposed rule. I hope that Commission staff is carefully considering the comments and the previous TAC discussions, which, by the way, are all available on the Commission’s website,7 when formulating this proposal. I also hope that Commission staff is researching and analyzing the current market structure and anticipating the impact of any rules in order to avoid negative consequences.

TAC Panel II: Designing a Twenty-First Century Surveillance System

After we address the charges in the Lewis book, the second panel will address the Commission’s own market surveillance capability. I do not believe that the Commission’s systems are adequate to oversee today’s fast and complex derivatives markets. Previously, I have expressed my frustration with the lack of a strategic technology plan. It is more than a little ironic that the Commission has been so thorough in dictating the regulatory requirements under Dodd-Frank, but is unwilling to set its priorities for technology upgrades. The Commission will continue to have an incomplete picture of today’s highly automated markets, thus hampering its ability to make well-informed regulatory decisions and surveil the markets, unless the Commission invests in a strategic technology plan.

Frankly, I am tired of asking the Commission for its preferred strategy so I am instead going to seek input from the exchanges, other self-regulatory organizations, and HFTs, who have invested millions of dollars in their own technology, for their thoughts on how the Commission should design the twenty-first century mouse trap to spot disruptive and manipulative trading practices – at any speed. I think it is important to recall that an HFT firm designed the SEC’s Midas surveillance platform.

Mr. Lewis’s book highlighted the rapid cancellation of orders by HFTs. Currently, the Commission does not have an order message data collection and analysis system. Without such a system, the Commission does not have access to the millions of order messages that inundate the exchanges on a minute-by-minute basis. How can the Commission understand and make decisions about today’s automated trading strategies without this system? With the high trade-to-cancel ratios, I would like to understand how the Commission can develop systems that are able to identify spoofing and momentum ignition strategies.

In addition, Flash Boys highlighted the interconnectedness of today’s markets. The Commission does not have cross-product and cross-market analytical tools. The Commission must develop a database to link the futures, swaps, and options markets to perform this cross-market analysis and surveillance. Again, without such tools, the Commission cannot effectively oversee today’s automated markets.

These are just two examples of the surveillance capabilities that we will discuss at the next TAC meeting. I also want to hear from market participants, exchanges, vendors, and other interested parties beyond the TAC meeting about their specific ideas regarding the Commission’s development of a twenty-first century surveillance system. So, after the June 3rd TAC meeting, I plan to put a link on the TAC website so that parties can submit their proposals or ideas about how the Commission should develop such a surveillance system. I hope that many interested parties will submit comprehensive plans and that the Commission will seriously review these proposals in developing its technology strategy.

TAC Panel III: Increasing Buy Side Participation on SEFs

Moving away from HFT, the final TAC topic will discuss buy side participation on SEFs. I have been a little concerned that the buy side has been slow to get involved in SEF trading. I am also concerned about the decline in SEF trading over the last month and would like to better understand the cause.8 We will hear from the buy side about any remaining obstacles for them to actively trade on SEFs and discuss potential solutions. I would also like to hear about any lingering problems with the SEF rules.

We will have a busy TAC agenda with these three very important and timely topics so I hope that you will tune in to the discussion.

Cross-Border: Let’s Close the Deal on International Harmonization

My second topic is cross-border harmonization – or the lack thereof.

Of course the swaps market is a global market and shifts in its market structure are also happening outside of the U.S. Last December when the Commission made its extremely narrow substituted compliance determinations, I advocated for a much more expansive effort to recognize the on-going international efforts by regulatory colleagues.9 That approach would minimize disruption in the changing landscape and alleviate the burden of regulatory uncertainty and duplicative compliance with both U.S. and foreign regulations. I also advocated for a flexible, outcomes-based approach to the substituted compliance process, consistent with the agreement of the Over-the-Counter (“OTC”) Derivatives Regulators Group (“ODRG”).10

The Commission has not made any additional substituted compliance determinations since last December, which is having the tangible and negative effect of fragmenting liquidity in the swaps market.11 Unless the Commission and foreign regulators undertake serious efforts to recognize each other’s regulatory regimes on data, clearing, and execution based on a flexible, outcomes-based approach, we risk developing micro-solutions that highlight our differences rather than our commonality. I urge the Commission and foreign regulators to demonstrate our commitment to G20 principles by quickly “closing the deal” on data and clearing recognition and solving for the difference in timing on exchange trading.

Data: It’s Time for “Project Harmonization”

European Union (“EU”) reporting rules under the European Market Infrastructure Regulation (“EMIR”) became effective almost three months ago, but there is still no international data sharing agreement between the U.S. and EU and no mutual recognition of swap data repositories and EU trade repositories. These agreements are crucial so regulators can compare and aggregate data in order to monitor and analyze risks in the global financial system. It is also important so that market participants are not burdened by duplicative reporting requirements.

I am pleased that the Commission and other regulators have been working diligently on the data challenges here in the U.S. I thank U.S. Treasury Acting Deputy Secretary and Under Secretary for Domestic Finance Mary Miller for her support for improving swaps data reporting, standardization, and sharing. I also thank the U.S. Treasury’s Office of Financial Research for their assistance in working with the Commission to improve its swaps data quality.

Regulators have devoted much work to the swaps data challenges; now it is time to quickly resolve the outstanding issues. Both the Dodd-Frank Act and EMIR12 included provisions for international data sharing so that our two jurisdictions could cooperate in carrying out the G20 OTC derivatives reform mandates. In keeping with these provisions and the ODRG agreement, I call on the Commission and the EU to sign an international data sharing agreement, collaborate to harmonize both the form and format of data being reported, and recognize each other’s swap trade repositories. We must get back to the substituted compliance process and follow a flexible, outcomes-based approach.

Qualifying Multilateral Trading Facilities: Is This the Right Solution?

Last month, Commission staff issued a clarification to its conditional relief for Qualifying Multilateral Trading Facilities (“Qualifying MTFs”).13 In order for an MTF to qualify for this relief from the SEF registration requirement, it basically has to look like a SEF and comply with the Commission’s reporting and clearing requirements. In addition, Commission staff may pull the relief if a significant proportion of the participants are U.S. persons and a significant proportion of the growth in trading is attributable to U.S. persons.

Given the detailed conditions in the relief and the possibility of having the relief pulled, it is not surprising that MTFs are not signing up for such recognition. Once again, the Commission will not be able to achieve mutual recognition with foreign regulators if it continues to impose the SEF regime on foreign execution platforms. The Commission’s approach thus far also does not bode well for any future exempt SEF rulemaking.

There is recent evidence that the lack of substituted compliance is bifurcating liquidity into U.S. and non-U.S. pools, with U.S. persons suffering the consequences.14 An article last week by Risk.net provided a good analysis of the issue, noting that non-U.S. persons are refusing to trade with U.S. persons, and instead, insisting on trading with U.S. banks’ non-guaranteed affiliates to avoid the Commission’s regulations.15 This means U.S. persons cannot directly access non-U.S. pools of liquidity and must instead trade through the banks.16 The story also points out that the Qualifying MTF relief has not helped because it basically provides for a SEF regime and the only way to reverse the fragmentation is through mutual recognition.17

The Commission and foreign regulators have the power to reverse this liquidity fragmentation before it becomes permanent. However, the Commission must work with foreign regulators and follow a flexible, outcomes-based substituted compliance approach to do so.

Let’s Declare Victory on Clearing and Move to Implementation

Another area that is ripe for substituted compliance is clearing. Thanks to the good work of the International Organization of Securities Commissions (“IOSCO”), regulators have established international standards for central counterparties (“CCPs”) known as the Principles for Financial Market Infrastructures (“PFMIs”).18

Today, I am sending a letter to European Commissioner for Internal Market and Services Michel Barnier that is in the same spirit of the “Path Forward Statement,”19 asking him to move forward with U.S. equivalence and CCP recognition under EMIR. In this letter, I offer my assistance to make this happen by the June 15th deadline under the Capital Requirements Directive (“CRD IV”). I am concerned that further delay by the European Commission (“EC”) in making an equivalence decision for the U.S. derivatives regulatory regime will impede the European Securities Market Authority from recognizing U.S. CCPs by this deadline.

Last year, the Commission finished adopting the PFMIs. Without recognition, U.S. CCPs will not qualify as Qualifying CCPs (“QCCPs”) for purposes of the Basel III risk-weighting approach for banking institutions. U.S. CCPs will also be unable to maintain direct clearing member relationships with EU firms and will be ineligible to clear contracts subject to the EU clearing mandate next year. These scenarios would be detrimental to both U.S. and EU interests by leading to market fragmentation and contraction of liquidity, as well as market disruption and dislocation.

In the spirit of international harmonization, I urge the EC to quickly resolve any outstanding issues so that equivalence and CCP recognition is achieved by June 15th.

I fear that without tangible evidence of flexible, outcomes-based recognition, regulators may be left with one-off rule based solutions. It is time we bring G20 members back to the table to: 1) sign an agreement on data and work to harmonize data to enable sharing, 2) begin discussions on exchange trading standards so that we can stop implementing solutions that fracture liquidity, and 3) provide mutual recognition for those entities that meet the PFMIs so that the market can move forward on mandatory clearing.

Regulatory Path Forward: Let’s Fix What’s Broken

Now, let me turn to my last topic — the Commission’s regulatory path forward. The Commission is moving forward on a number of issues that impact market structure, but the Commission must also spend the time to fix unworkable rules in order to alleviate the negative impacts on the market.

Package Transactions

Last week, Commission staff issued a no-action letter phasing-in package trades.20 As of May 16, 2014, all package transactions where each component of the transaction is subject to the trade execution mandate are required to be executed on a SEF through either the order book or the request-for-quote to 2 or on a designated contract market (“DCM”). Commission staff provided further relief for other types of package trades, such as those involving a future, an uncleared swap, or a swap that is not within the Commission’s exclusive jurisdiction.

I believe that the no-action letter strikes an appropriate balance between promoting trading on SEFs and the need to preserve orderly markets. Deriving a workable solution for these complex transactions is essential to ensuring a level, competitive playing field, and preserving orderly markets so I hope that Commission staff will continue to work on solutions for package transactions that received further relief.

Clearing Mandate for Non-Deliverable Forwards

Commission staff is finalizing a proposal to establish a clearing requirement for certain non-deliverable forwards (“NDFs”). Market interest in clearing NDFs is driven by forthcoming requirements to hold additional capital and post initial margin against non-centrally cleared derivatives. Similar to the clearing mandates for interest rate and credit default swaps, the NDF proposal will allow for phased-in compliance and will set in motion a shift from OTC trading to a more transparent trading environment. I understand that the workflow to achieve clearing and straight-through-processing for NDFs is more complicated than for interest rate and credit default swaps so I hope that Commission staff highlights these issues in its future proposal.

It is also important to note that NDF participants should prepare for a quick transition to mandatory SEF trading after the clearing requirement takes effect because the Commission does not have much say in made available-to-trade determinations. I hope that the proposed NDF rule will ask questions about any SEF trading issues so that the Commission can provide market participants with sufficient time to ensure that they have the necessary technology in place to trade NDFs on SEFs. I encourage commenters to opine on these and other issues when the Commission publishes the proposal.

Other Rules

Several other rulemakings are forthcoming, but it is not clear whether they will wait until after the full Commission is seated. The Commission has been considering for some time a futures block rule proposal that will limit the availability of block trades. Exchanges have facilitated the transition from swaps to futures by establishing low threshold sizes for block trades in futures contracts. It remains to be seen how Commission rules would affect this transition.21

Additionally, all of the Commission nominees have committed to finalizing the position limits rule. Setting position limits is not an easy task. The Commission is supposed to stop excessive speculation and manipulation, but must also protect the essential price discovery process and hedging function in the markets. The new commissioners will have their work cut out for them on this rule.

In addition to promulgating rules, the Commission must take a closer look at its rule implementation process, re-visit unworkable rules, and articulate a roadmap for market participants so that they can comply with our new rules. Unfortunately, the Commission has not always been up to par on these responsibilities.

Recordkeeping Rule 1.35(a)

The recordkeeping rule 1.35(a) provides a good example.22 In general, the rule requires Futures Commission Merchants, Introducing Brokers, and members of DCMs and SEFs that are registered or required to be registered with the Commission to record all oral communications as part of a trade record, including preliminary conversations that occur over cell phones if they lead to the execution of a transaction.23

One adverse impact of the rule is the increased recordkeeping requirements for SEF members. Until the SEF rule became final, Commodity Trading Advisors (“CTAs”) operated under the assumption that asset managers and their clients would not be “members” of SEFs, but simply participants using a SEF platform as an execution venue for their trades. However, the term “member” is unclear and thus CTAs have been dragged into the scope of rule 1.35(a). I am pleased that Commission staff hosted a roundtable on this issue to obtain feedback from market participants and provided relief from compliance with the oral recording requirement for CTAs until the end of this year.24

But entities that do not qualify for the exemption will need to purchase expensive recording technology to comply with the requirements of the rule. While large banking institutions will have the means to find a compliance solution, smaller institutions will take the heavy brunt of regulatory compliance.

I hope that the Commission will implement a workable rule amendment that strikes an appropriate balance between the Commission’s interest in preserving its enforcement authority and imposing on market participants workable and cost-effective requirements.

Forward Contracts with Volumetric Optionality

Speaking of workable solutions, as you all know, end-users have been raising concerns about the definition of a volumetric option. According to the Commission’s rules, contracts with embedded volumetric optionality may qualify for the forward contract exclusion only if exercise of the optionality is based on physical factors that are outside the control of the parties.25 This logic contradicts how market participants have traditionally used volumetric options. Commission staff’s recent roundtable discussed this issue so I now encourage the Commission to implement a workable solution through a rule amendment.

Conclusion

Although shifts in market structure are inevitable, regulators should ensure a smooth transition for the market. Before promulgating rules, the Commission must research and analyze current market structure and anticipate the impact of any rule changes.

I understand that it is impossible to anticipate all of the negative impacts of all of the Commission’s complex rules. However, once the Commission discovers a negative impact, it must re-visit unworkable rules and quickly identify solutions through a rule amendment.

Finally, the Commission and foreign regulators must work together to harmonize their regulatory regimes so that swaps market trading remains global. Fragmented swaps liquidity in today’s market is a reminder of the negative effect of the regulators’ failure to harmonize our regimes. The best way for regulators to reverse this market fragmentation is to adopt a flexible, outcomes-based substituted compliance approach.

Thank you very much for your time.

1 Duncan Wood, Scott O’Malia, It’s Your Fault, Risk.net, May 1, 2014, available at http://www.risk.net/risk-magazine/opinion/2342391/scott-omalia-its-your-fault.

2 Peter Madigan, US end-users are losers in swaps liquidity split, Risk.net, Apr. 28, 2014, available at http://www.risk.net/risk-magazine/feature/2340854/us-end-users-are-the-losers-in-swaps-liquidity-split.

3 Id.

4 Neil Munshi, CME says high-frequency trading outcry should not hit futures, Financial Times, May 1, 2014, available at http://www.ft.com/intl/cms/s/0/df5e54ea-d126-11e3-bdbb-00144feabdc0.html#axzz30aT9KqtU.

5 Sarah N. Lynch, SEC chair to Congress: ‘The markets are not rigged’, Reuters, Apr. 29, 2014, available at http://www.reuters.com/article/2014/04/29/us-sec-highspeed-trading-idUSBREA3S0OO20140429.

6 Concept Release on Risk Controls and System Safeguards for Automated Trading Environments, 78 FR 56542 (Sep. 12, 2013).

7 TAC meeting transcripts and presentations are available at http://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.

8 The Clarus blog shows declining SEF volumes since March, available at http://www.clarusft.com/sef-week-30/.

9 Statement of Dissent by Commissioner Scott D. O’Malia, Comparability Determinations for Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland: Certain Entity and Transaction-Level Requirements (Dec. 20, 2013), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement122013.

10 ODRG report to the G20, available at http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.

11 Peter Madigan, US end-users are losers in swaps liquidity split, Risk.net, Apr. 28, 2014.

12 European Market Infrastructure Regulation, Regulation (EU) 648/2012, of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, Central Counterparties and Trade Repositories, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF.

13 CFTC Letter No. 14-46 (Apr. 9, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-46.pdf.

14 Peter Madigan, US end-users are losers in swaps liquidity split, Risk.net, Apr. 28, 2014.

15 Id.

16 Id.

17 Id.

18 Derivatives Clearing Organizations and International Standards, 78 FR 72476 (Dec. 2, 2013).

19 The European Commission and the CFTC reach a Common Path Forward on Derivatives, available at http://www.cftc.gov/PressRoom/PressReleases/pr6640-13.

20 CFTC Letter No. 14-62 (May 1, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-62.pdf.

21 Keynote Address by Commissioner Scott D. O’Malia, New Risk in Energy 2014: Energy Trading Risk and the Policy that Drives It, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/omaliapresentation040714.pdf. See Futures block data on pages 6-8 of the presentation.

22 17 CFR 1.35(a).

23 Id.

24 CFTC Letter No. 14-60 (Apr. 25, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-60.pdf.

25 Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012).

Last Updated: May 6, 2014

SEC COMMISSIONER PIWOWAR'S SPEECH TO U.S. CHAMBER OF COMMERCE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Advancing and Defending the SEC’s Core Mission
 Commissioner Michael S. Piwowar
U.S. Chamber of Commerce
Washington, D.C.
Jan. 27, 2014

Thank you, Chris (Donahue), for that very kind introduction. David Hirschmann, I commend you for the work that you do at the Chamber’s Center for Capital Markets Competitiveness to promote America’s global leadership in capital formation. I have had the pleasure of working with a number of talented people at the Center over the past few years and I want to take a moment to acknowledge just a few. Tom Quaadman, it has been great to join you in your efforts to ensure that the financial regulatory agencies are following the law and basing their decisions on the best available information about a regulatory action’s likely economic consequences. Jess Sharp, who was in the trenches with me at the White House during the height of the global financial crisis, please continue to advocate for bringing regulatory and public transparency to the over-the-counter derivatives markets while preserving Main Street’s ability to hedge their business risks. Alice Joe, I have enjoyed working with you on money market fund reforms that are consistent with the Securities and Exchange Commission’s (SEC’s or Commission’s) goal of preserving the benefits of the product for investors and the short-term funding markets.

I also want to thank everyone for being so understanding about rescheduling my speech due to the federal government shutdown last October. I am happy to finally be here to talk about some of the issues we are facing at the Commission. Before proceeding, I need to provide the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the Commission or my fellow Commissioners.

I would like to take the opportunity today to articulate how I believe an SEC Commissioner should approach each and every issue that comes before the Commission. As you know, the SEC is confronted with a wide range of matters including rulemakings, exemptive requests, interpretive guidance, and, of course, enforcement actions. Regardless of the area, when making decisions, a Commissioner should be guided by the SEC’s core mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

My overarching philosophy as an SEC Commissioner is pretty simple. It boils down to a question that I ask myself every morning on my way to work: What can I do today to help advance and defend the SEC’s core mission? I choose the words “advance” and “defend” carefully. They are words that can be used to describe both sports strategies and military strategies, which are appropriate analogies for an SEC Commissioner. Some days I feel like I am in a friendly competition that involves well-defined and well-enforced rules. Other days I seem to be in hand-to-hand combat with outside forces.

First, I will explain what I mean when I say “advance the SEC’s core mission,” by highlighting some items that I believe should be priorities for the Commission over the next several months. Then, I will focus on how we can and should “defend the SEC’s core mission.” By way of example, and as I will discuss further, money market fund reform presents an opportunity to both advance and defend the SEC’s mission. I have not yet reached any conclusions on the substance of money market reform, but I do want to preview how I am approaching the issue. Finally, time permitting, I am happy to answer any questions you may have.

Advancing the SEC’s Core Mission

Obviously, the Commission is quite busy with our Dodd-Frank Act and JOBS Act mandates. Nonetheless, there are areas in which we can and should undertake efforts to advance our core mission. Let me highlight five.

Comprehensive Review of Equity Market Structure: I recently gave a speech in which I called for a comprehensive equity market structure review program that draws on lessons from the 1963 “Report of the Special Study of Securities Markets of the Securities and Exchange Commission”[1] and the 2012 UK Foresight Programme report on “The Future of Computer Trading in Financial Markets – An International Perspective.”[2] Without going into great detail, there are two key features of my vision for a comprehensive review of equity market structure. First, in order to allow us to cover a wide range of topics, it should be a multi-year review. Second, so that each issue can be considered and addressed in sufficient depth, the Commission should leverage the resources of outside parties by leading a collaborative effort with market structure experts from the private sector and the academic world.[3]

Tick Size Pilot Program for Small Capitalization Companies: It is clear that the one-size-fits-all approach to market structure is not working for small capitalization companies. One idea to test how to allow the securities of small cap companies to trade more efficiently is to create a pilot program for alternative minimum tick sizes. I support such a pilot and would like to see it implemented as soon as possible. Even if increasing the tick size does not produce the benefits that proponents suggest it will, a pilot program will provide useful information about the dynamics of liquidity in our equity markets.

Incremental Fixed-Income Market Structure Changes: During my previous tour at the Commission, I was very involved with price transparency initiatives in the corporate bond and municipal bond markets. In one research study, my colleagues and I were able to show that providing post-trade prices on corporate bond transactions decreased transaction costs, which translated to investor savings of more than $1 billion per year.[4] Subsequent research shows that more can be done to enhance the fixed-income markets for the benefit of investors and issuers, including opportunities to “pick low-hanging fruit.” For example, while commissions on agency transactions must be disclosed, the same is not true for markups and markdowns on riskless principal transactions, even though the trades are economically equivalent. Therefore, I have asked the staff of the Commission’s Office of Municipal Securities to work with me to develop a few proposals to improve how the fixed-income markets operate.

Over-Reliance on Proxy Advisory Firm Recommendations: I see many similarities between the influence that proxy advisory firms wield today and how credit rating agencies were relied upon pre-crisis, including an over-reliance by investors on their recommendations.[5] Investment advisers are increasingly looking to the recommendations of proxy advisory firms for purposes of satisfying their fiduciary duty in connection with voting (or not voting) client securities. This reliance, in effect, shifts the fiduciary duty from the advisers to the proxy advisory firms, which, due to their relationships with issuers of the securities, may have their own distinct conflicts of interest. The Commission hosted a very productive Proxy Advisory Services Roundtable last month that highlighted these issues and made clear that we cannot continue to ignore the need for reform.[6] The Commission must not lose the momentum that was generated from the roundtable and should quickly move forward with initiatives to curb the unhealthy over-reliance on proxy advisory firm recommendations.

Compliance with Section 2 of Executive Order 13579 – Retrospective Analyses of Existing Rules:[7] Over two years ago, President Obama signed an Executive Order that, among other things, directs independent agencies such as the SEC to develop and implement a plan to conduct ongoing retrospective analyses of existing rules. The stated goal is “to determine whether any such regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives.” The Commission has not yet undertaken a serious effort to conduct a retrospective analysis of our existing rules in accordance with the directive. This must change.

 As if the SEC does not already have enough to do to advance our core mission, we are also faced with the need to defend it. Currently, I see two outside forces that are threatening our ability to effectively protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The first threat is special interests, from all parts of the political spectrum, that are trying to co-opt the SEC’s corporate disclosure regime to achieve their own objectives. The Commission, therefore, should carefully consider whether any additional disclosures benefit investors or whether they enable the agenda of special interests to the detriment of investors.

With simply our current disclosure requirements, I worry that investors are already suffering from what former SEC Commissioner Troy Paredes calls “information overload.” Commissioner Paredes points out that “[i]ronically, if investors are overloaded, more disclosure actually can result in less transparency and worse decisions, in which case capital is allocated less efficiently and market discipline is compromised.”[8] Last year, he called for a top-to-bottom review of the Commission’s disclosure regime.[9] I wholeheartedly agree. Such a review could help us identify special-interest disclosures that may have crept into our present disclosure regime and are counterproductive to creating informed investors.

The second threat to our core mission is banking regulators trying to impose their bank regulatory construct on SEC-regulated investment firms and investment products. Yet the Commission – not the banking or prudential regulators – is responsible for regulating markets. My concern is that the banking regulators, through the Financial Stability Oversight Council (FSOC or Council), are reaching into the SEC’s realm as market regulator. Therefore, one of my first acts as a Commissioner was to request that I be afforded an observational role at FSOC meetings. I also asked that, in addition, or in the alternative, my counsels be allowed to attend the biweekly FSOC Deputies Committee meetings. To be clear, I understand that the Dodd-Frank Act designates the SEC’s Chair as the Commission’s only voting member of the FSOC.[10] However, the statute also designates the Commission as a “member agency” of the Council.[11]

Unfortunately, my requests to attend FSOC meetings as a non-participating guest were denied. I do not think that they were unreasonable requests, and I did not ask for any special favors. I simply asked the FSOC to treat the SEC the same way it treats the Federal Reserve. If you look at the minutes from past FSOC meetings, which are publicly available on the FSOC’s website, you will see that three people from the Federal Reserve regularly attend FSOC meetings – the Chairman of the Federal Reserve Board of Governors (the Federal Reserve’s voting member), and his two guests: a Federal Reserve Governor (Daniel Tarullo), and the President of the Federal Reserve Bank of New York (William Dudley). I would like the FSOC to extend the same courtesy to the SEC and other member agencies.

One of the responses I received to my request was that, if the SEC started bringing multiple people to the Council meetings, then every agency would want to do the same. My answer to that concern is that the FSOC should get a bigger table. Or, it should stop allowing the Federal Reserve to bring three people to the Council meetings when other member agencies are afforded only one seat. This issue is not just an abstract one for me. The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies.

Last September, the Department of Treasury’s Office of Financial Research (OFR) published a study – and I use the term “study” loosely – prepared for the FSOC on the asset management industry.[12] The study sets the groundwork for the regulation of asset managers by the FSOC. Among the Council members, only the SEC solicited public feedback regarding the study.[13] I applaud Chair White for doing so. In response, the Commission has received more than 30 comment letters, including one from the Chamber. I vehemently believe that before the FSOC decides whether further study or action is warranted, the collective voices of the public and the SEC should be heard by the members of the Council. This is all the more important because the vast majority of asset management firms are SEC-regulated entities.

Another issue on which the SEC has ceded ground to the FSOC and banking regulators is money market fund reform. One of the most shocking decisions in the 80-year history of the SEC was the wholesale abdication of the Commission’s responsibility to the FSOC on money market funds.[14] This choice has been widely criticized by former chairmen, commissioners, and SEC senior staff as threatening the independence of the SEC and the other independent financial services regulatory agencies.[15] I am in complete agreement. The only somewhat coherent systemic risk argument about money market funds that I have heard articulated is that a run on money market funds could lead to banks failing because they cannot rollover short-term debt. The moral of that story is not that money market funds have “structural vulnerabilities.” It is that banks are too reliant on short-term funding. The banking regulators have the ability to address such a bank regulatory shortcoming directly. Nothing in the Dodd-Frank Act weakened or repealed that authority.

Instead of the FSOC spending time enabling bank regulators to encroach on the SEC’s jurisdiction in securities regulation, where we have superior expertise, the Council should focus on fulfilling its own mission of identifying threats to the financial stability of the United States. I have identified three entities that the FSOC should consider reviewing as non-bank systemically important financial institutions (non-bank SIFIs): the Federal Government, the Federal Reserve, and the Basel Committee on Banking Supervision.

Serious academic research, previous actions by the FSOC, and common sense support designating all three of these entities as non-bank SIFIs. Deborah Lucas, a prominent MIT economist and former assistant director at the Congressional Budget Office, makes a compelling case that the government is a significant source of systemic risk, and therefore it falls under the mandate of the FSOC and OFR to monitor and study it.[16] Viral Acharya, a respected NYU financial economist, posits that governments effectively operate as “shadow banks” in the financial sector, that their role as shadow banks have been at the center of the financial crisis, and that they continue to pose a threat to financial stability.[17] Even the FSOC itself recognizes that the Federal Government has a significant impact on the economy – at a recent meeting the Council discussed the effects of a government shutdown and a debt ceiling impasse on the economy and financial markets, including short-term funding markets.[18] With respect to the Federal Reserve, its balance sheet stands at over $4 trillion in assets and continues to grow at a current tapered pace of $75 billion per month.[19] Andrew Haldane, the Bank of England’s Executive Director of Financial Stability, co-wrote a paper famously titled “The Dog and the Frisbee,” in which the academic case is made for simplicity in banking regulations.[20] Among other things, the paper explores why complex regulation, such as Basel risk-weighted capital standards, are not only costly and cumbersome, but suboptimal for preventing and controlling financial crises.

Money Market Fund Reform – Advancing and Defending the SEC’s Core Mission
I thought I would end with some words on how I am thinking about whether additional money market fund reforms are needed, and, if so, how I will be evaluating each alternative.

As an economist, one of the first questions I ask in the context of any rulemaking is “What is the baseline?” In other words, what is the starting point from which I will evaluate the costs and benefits of any proposed regulatory change? In the case of money market funds, it is tempting to start with a baseline of September 2008, when the Reserve Primary Fund “broke the buck.” However, the Commission adopted a number of new money market fund regulations in 2010.[21] The stated objectives of those rules were to “increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds.”[22]

Therefore, the proper baseline from which to evaluate any additional money market fund rule proposals is the current regulatory framework, which includes the 2010 reforms. From a cost-benefit perspective, the next relevant questions are “What are the marginal benefits of additional regulations”; and “what are the marginal costs of those additional regulations?” In order to answer those questions, we need to understand how effective the 2010 regulations were. The Commission’s Division of Economic and Risk Analysis (“DERA”) has done an excellent job providing the answers to those questions in their 2012 staff report “Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher,”[23] and in the economic analysis in the Commission’s 2013 proposing release for additional money market fund reforms.[24]

After carefully reading both of those documents and engaging in numerous discussions with Commission staff and money market fund participants, I have concluded that the 2010 money market fund regulations were, in economist-speak, “necessary, but not sufficient.” They provided much-needed investor protection improvements in the areas of disclosure, liquidity, credit quality, and operations. However, the reforms were not sufficient to address remaining investor protection concerns in at least two areas. Namely, more should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions. There also remains a need to provide investors with more timely information about funds’ holdings, including the value of those holdings.

I have not reached any conclusions on which alternatives in the Commission’s outstanding rule proposal best address these investor protection concerns while preserving the benefits of money market funds for investors and the short-term funding markets. I will be working with Commission staff over the coming weeks and months to evaluate the marginal benefits of the various alternatives – floating NAV, fees, gates, additional disclosures, etc. – and their associated costs.

Thank you all for your attention. I am happy to answer any questions you may have.


[1] Report of Special Study of Securities Markets of the Securities & Exchange Commission, all chapters available at  http://www.sechistorical.org/museum/papers/1960/page-2.php under the heading “SEC Special Study of the Securities Markets.”

[2] See http://www.bis.gov.uk/assets/foresight/docs/computer-trading/12-1086-future-of-computer-trading-in-financial-markets-report.pdf .

[3] See The Benefit of Hindsight and the Promise of Foresight: A Proposal for A Comprehensive Review of Equity Market Structure, Commissioner Michael S. Piwowar, U.S. Securities and Exchange Commission, London, England (Dec. 9, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540470552.

[4] See Edwards, A. K., L. E. Harris, & M. S. Piwowar (2007): “Corporate Bond Market Transaction Costs and Transparency,” Journal of Finance, 62, 1421–1451.

[5] See Opening Statement at the Proxy Advisory Services Roundtable, Commissioner Michael S. Piwowar, U.S. Securities and Exchange Commission, Washington, D.C. (Dec. 5, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540449928.

[6] See http://www.sec.gov/spotlight/proxy-advisory-services.shtml.

[7] See Executive Order 13579 – Regulation and Independent Regulatory Agencies (July 11, 2011). See also M-11-28 – Memorandum for the Heads of Independent Regulatory Agencies (July 22, 2011).

[8] See Remarks at The SEC Speaks in 2013, Commissioner Troy A. Paredes, U.S. Securities and Exchange Commission, Washington, D.C. (Feb. 22, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1365171492408#.Ut2WJbROmM8.

[9]Id.

[10] See Section 111 of the Dodd-Frank Act.

[11] See Section 102 of the Dodd-Frank Act.

[12] See http://www.treasury.gov/initiatives/ofr/research/Documents/OFR_AMFS_FINAL.pdf.

[13] See http://www.sec.gov/divisions/investment/comments-ofr-asset-management-study.shtml. Comments are available at http://www.sec.gov/comments/am-1/am-1.shtml.

[14] See Statement at SEC Open Meeting – Proposed Rules Regarding Money Market Funds, Commissioner Daniel M. Gallagher, U.S. Securities and Exchange Commission, Washington, D.C. (June 5, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1365171575594.

[15] See letter from Former Chairmen, Commissioners, and Senior Staff of the U.S. Securities and Exchange Commission to the Members of the Financial Stability Oversight Council, Re: Jurisdiction of Independent Financial Services Regulatory Agencies (Feb. 20, 2013), available at

http://www.preservemoneymarketfunds.org/wp-content/uploads/2011/04/Former-SEC-staff.pdf .

[16] See Deborah Lucas, Evaluating the Government as a Source of Systemic Risk, First Draft: Sept. 30, 2011, available at  http://dlucas.scripts.mit.edu/docs/SystemicRisk111012.pdf .

[17] See Viral V. Acharya, Governments as Shadow Banks: The Looming Threat to Financial Stability, Sept. 2011, available at http://www.federalreserve.gov/events/conferences/2011/rsr/papers/Acharya.pdf.

[18] See Financial Stability Oversight Council, Meeting Minutes, Oct. 31, 2013, http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/Oct%2031,%202013.pdf.

[19] See Total Assets of the Federal Reserve, available at http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm.

[20] See Andrew G. Haldane & Vasileios Madouros, The Dog and the Frisbee (Aug. 31, 2012). The paper was presented at the Federal Reserve Bank of Kansas City's 36th economic policy symposium “The Changing Policy Landscape,” Jackson Hole, Wyoming, available at http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf .

[21] See Money Market Fund Reform, Investment Company Act Rel. No. 29132 (Feb. 23, 2010), available at http://www.sec.gov/rules/final/2010/ic-29132fr.pdf.

[22] See http://www.sec.gov/news/press/2010/2010-14.htm.

[23] The staff report can be found at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf. At the time the report was conducted, DERA was known as the Division of Risk, Strategy, and Financial Innovation.

[24] See Money Market Fund Reforms; Amendments to Form PF, Investment Company Act Rel. No. 30551 (June 5, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9408.pdf.

CFTC COMMISSIONER WETJEN'S STATEMENT REGARDING CONSUMER PROTECTIONS IN THE DERIVATIVES MARKETPLACE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Statement of Commissioner Mark P. Wetjen, Public Meeting of the Commodity Futures Trading Commission
October 30, 2013

Thank you Chairman Gensler. And my thanks to the professional staff for their hard work on the important final rule we are considering today regarding customer protection.

Customer Protection

The CFTC's core mission is to protect futures and swaps customers from fraud, manipulation, abusive practices and systemic risk. In pursuing this mission, it is vital that the commission unceasingly look to update and improve the protections we have in order to better protect the public and ensure the safety, soundness, and integrity of those operating in the derivatives marketplace.

The final customer protection rule before us today requires important improvements to a range of protections that have been implemented by the commission and industry in recent months. It fills certain remaining regulatory gaps to prevent future failures in the FCM community, and enhances nearly every protection afforded customers of FCMs in the futures and cleared-swaps markets. Customers will benefit from enhancements to FCM risk management programs, modernized audit programs and streamlined measures that will better insulate customers from fellow customer risk.

Residual Interest

The residual-interest provisions have been the most discussed part of the proposal. The commission received a significant number of comment letters in response to that proposal, which would have required FCMs to maintain “at all times” enough residual interest in their segregated accounts to cover all customer margin deficits. That approach was intended to limit fellow-customer risk by ensuring that one customer would in no circumstance be responsible for unwittingly covering another customer’s margin obligations.

Although the proposal offered one permissible construction of the Commodity Exchange Act, it suffered from some practical shortcomings. Those practical shortcomings, in my judgment, are appropriately addressed in the document before us today.

For example, many suggested that the “at all times” requirement under the proposal likely would have imposed significant capital costs on FCMs, which could have led to the unintended effect of limiting access to the derivatives markets. Many contended that this would be too high a price to pay when measured against the corresponding benefit of mitigating fellow-customer risks. The commission has considered these comments and has taken a different approach in today’s release.

The compromise reflected in the final rule is intended to usher in improvements to margin-collection practices over time and to protect access to the markets for a broad cross-section of participants. As a general matter, I strongly support improvements to the residual-interest requirements because of the critical policy objectives they are designed to achieve. First, they will better protect the excess segregation funds of a customer in the event of an FCM bankruptcy. Second, they will encourage FCMs to more actively monitor customer accounts for instances when those accounts are under-margined. And third, they will incentivize FCMs to address those circumstances when an account is under-margined. Together, these enhancements will better protect the safety and soundness of the FCM.

Importantly, the commission has given itself sufficient time to evaluate the FCM community’s progress in implementing the residual-interest policy in the final rule, and to change course if necessary. Indeed, the phased compliance schedule provided in today’s release was a critical component of getting to this final compromise on residual interest.

That compromise is reasonable and measured. For one year, there will be no change to current practice with respect to the treatment of residual interest. After that year, FCMs will be required to comply with the residual-interest requirement as of the close of business on the day following the margin-deficit calculation. This is a necessary and significant change to current market practice.

Thirty months after today’s release is published, commission staff is obligated to conduct a study determining the feasibility, costs and benefits of moving the residual-interest deadline to the completion of the first clearing-settlement cycle following the trade date. The study will be published for public comment, and a public roundtable will be held to solicit the views of market participants.

Finally, after five years, the residual-interest requirement will move up to the first clearing settlement cycle of the day, typically first thing in the morning, should the commission choose not to change course based upon recommendations in the study or in reaction to public feedback at the roundtable.

To be sure, if this end-state were implemented today it would no doubt create a significant cost to FCMs and to market participants. The five-year phase-in period, however, provides the industry an opportunity to streamline margin-collection practices and to take advantage of any technological solutions that may be developed in the meantime.

Equally important, today’s release ensures that future residual-interest requirements will not be imposed on the FCM community if the facts on the ground regarding feasibility and cost do not support it. It is important to note that the study and roundtable are not optional but rather mandated by law, which means that the newly updated information will be brought to the commission before the phase-in period would end.

If the commission decides that it is appropriate to change the residual-interest deadline, the commission may act nimbly and implement a new compliance schedule for that deadline by order, without the procedural hurdles of notice and comment. I am confident that if the commission is presented with convincing facts through this process, it will be compelled to respond appropriately.

All stakeholders in today’s release – including policymakers, FCMs and their customers – rightly anticipate that new services and technologies will provide solutions to today’s compliance challenges. I know that all of us not only welcome those advancements but hope they are brought to market as quickly as practicable. The approach of this rulemaking appropriately incentivizes that outcome.

For that reason, I anticipate that technological solutions will facilitate compliance with residual-interest requirements in the near future for those who could not comply today. I must point out that the comment file to this rule suggests that the vast majority of the marketplace could comply with more abbreviated timelines for margin calls and payments today.

I also anticipate that the flexibility built into this final rule will help avoid the less desirable, alternative methods of compliance suggested by commenters, including self-funding or pre-funding residual interest or margin obligations, as some have predicted. To be more clear, I strongly prefer, and indeed expect, that FCMs will not pursue these options in order to comply with today’s release. This judgment is based in part on the rapid advancement in settlement solutions in recent years, as well as the fact that the latter options may not – all things considered – be as commercially viable.

The expense of pre-funding margin accounts was a special concern of the agricultural community raised in their comments. I spent many days with agricultural producers over the last several months, discussing this issue and others. I met with a number of producers in my home state of Iowa who actively use the derivatives markets to hedge their production risks. I have listened to and carefully considered their concerns about the residual-interest requirement. Today’s release takes those concerns into account, and I believe that their most-pressing fears will not be realized because of this rule.

Meanwhile, even today producers can make intra-day margin payments to FCMs through banking or credit relationships once a margin call is received. Based on what I have learned over recent months, these types of relationships are at a minimum common in the producer community, and seemingly the norm for larger producers. For those producers who do not currently rely on these services, again, I expect other solutions to payment settlement will be offered, or producers will in time embrace those already available, with marginal added expense to them.

I also would like to clarify that today’s release does require FCMs to take a capital charge for failure to meet its residual-interest requirement, but this falls on the FCM at the close of business the day after its residual-interest obligation. Importantly, today’s release phases in the timing of this capital-charge obligation until one year after its publication in the federal register, as some commenters suggested.

I would like to thank the staff for their work in putting together this balanced approach. With the concerns about residual interest properly addressed, I am happy to support the final rule as an important step forward in the commission’s ongoing efforts to protect customers.

As a final note, I look forward to taking up the Volcker Rule and the position-limits proposal by year-end, along with a number of commission determinations on substituted compliance. As I said at the time we finalized our cross-border guidance, those determinations will benefit from as much transparency as practicable. With that, I look forward to supporting the staff’s recommendations on the rule before the commission today.

U.S.-EUROPE, THE WAY TO APPROACH CROSS-BORDER DERIVATIVES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
July 11, 2013

The European Commission and the CFTC reach a Common Path Forward on Derivatives

Washington, DC – European Commissioner Michel Barnier and United States Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler today announced a Path Forward regarding their joint understandings on a package of measures for how to approach cross-border derivatives.

Commissioner Barnier said that “our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends.”

Chairman Gensler said, “With these joint understandings, together, we’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide.  I want to thank Commissioner Barnier and all his colleagues for their constructive collaboration throughout this reform process.”

The Path Forward responds to the G20 commitment to lower risk and promote transparency in the over-the-counter (OTC) derivatives markets, which were are at the heart of the financial crisis. The CFTC and the European Commission share a common objective of a steadfast and rigorous implementation of these commitments. Together with the European Securities Market Authority (ESMA), the European Commission (EC) and the United States have made significant progress in their regulatory reforms. Close legislative and regulatory co-ordination and co-operation between the European Commission (EC) and the CFTC has ensured that the rules in place pursue the same objectives and generate the same outcomes.  As a result of the joint collaborative effort, in many places, final rules are essentially identical, even though the regulatory calendars are not always synchronized.

As the market subject to these regulations is international, it is acknowledged that, notwithstanding the high degree of similarity that already exists between the respective requirements, without coordination, subjecting the global market to the simultaneous application of each other’s requirements could lead to conflicts of law, inconsistencies, and legal uncertainty. The CFTC and the EC, with ESMA, have worked closely and collaboratively to implement their rules and regulations to avoid this to the greatest extent possible and consistent with international legal principles. The CFTC and the European Commission share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.

For bilateral uncleared swaps, and because EU and US rules for risk mitigation are essentially identical, the CFTC plans to issue no-action relief for certain transaction-based requirements.  In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.

For the trading-execution requirement, the CFTC plans to permit foreign boards of trade that have received direct access no-action relief to also list swap contracts for trading by direct access to avoid market and liquidity disruption.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  The CFTC staff will issue no-action letters to this effect. In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will in January 2014 assess progress.

The EC, ESMA, and the CFTC will continue to work together on similar approaches to straight-through-processing and harmonized international rules on margins for uncleared swaps and have essentially identical processes with regard to adopting mandatory clearing obligations and regulating intra-group swaps/derivatives trades. They also share common goals of ensuring that the overseas guaranteed subsidiaries and branches of US and EU persons are not allowed to operate outside of important G20 reforms.

Their approaches for reporting to trade repositories are also very similar and the EC, ESMA and the CFTC will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws.  They will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

With respect to central counterparties (CCPs), CFTC rules and EMIR are both based on international minimum standards.  CCP initial margin coverage is the only key material difference and the parties will work together to reduce any regulatory arbitrage opportunities.  They will also endeavour to ensure that CCPs that have not yet been recognised or registered in the US or the EU will be permitted to continue their business operations.

Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief awarded by the CFTC will be reflected in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership. For the future, they have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of their respective rules.

The EU and the US are leading by example and invite others countries to join this approach to make sure that the G20 commitments will be applied in a sensible and rigorous way to cross-border derivatives trades.

Cross-Border Regulation of Swaps/Derivatives
Discussions between the Commodity Futures Trading Commission and the European Union – A Path Forward

July 11, 2013

Our common efforts and joint work

In response to the financial crisis, the G-20 nations agreed on a common goal: to protect the public at large from the financial risks that led to bailouts and economic recession. We agreed to lower risk and promote transparency in a market that is truly global by agreeing to report all over-the-counter derivatives to trade repositories, to centrally clear standardized OTC derivatives and, where appropriate, require trading on transparent and multilateral venues.

The United States (US) and the European Union (EU) share a common objective of an ambitious and rigorous implementation of these G-20 commitments.

The US and the EU have made significant progress in their regulatory reforms.

Close legislative and regulatory co-ordination and co-operation between the European Commission (EC) and the Commodity Futures Trading Commission (CFTC) has ensured that the rules in place pursue the same objectives and generate the same outcomes.

Both regimes will have strict legal requirements in place governing central clearing, trade reporting, and trade execution.  The CFTC is in the process of implementing such regulations and the EC has adopted the regulations giving effect to these requirements.

Pursuant to our respective legislative frameworks and mandates, certain EU rules are stricter in some areas and certain US rules are stricter in others.  The calendar of compliance dates is not always synchronized due to differences in our legislative and rulemaking processes, but that does not change our common goal or our common approach.

As a result of this joint collaborative effort, in many places certain final rules are already essentially identical.

We also fully recognize that the market subject to this regulation is international. The majority of the global swaps and derivatives business is conducted within or between the EU and the US.  A significant amount of transactions take place between counterparties in different jurisdictions (‘cross-border’). The US and the EU both have legitimate interests and concerns about an appropriate regulation of this activity and both could seek legal jurisdiction over the transactions and market participants, and both could subject them to their requirements.

Recognizing the high degree of similarity that already exists between our respective requirements, we seek to address conflicts of law, inconsistencies, and legal uncertainty that may arise from the simultaneous application of EU and US requirements.  Thus, the CFTC, the EC, and the European Securities and Markets Authority (ESMA) have worked closely and collaboratively to fully understand each other's concerns and regulatory approaches.  We have agreed to implement our rules and regulations in a manner that will address conflicts, inconsistencies, and uncertainty to the greatest extent possible and consistent with international legal principles.

As swap market/derivatives participants come into compliance with new regulatory regimes around the globe, a close working relationship between the US and EU with regard to cross-border swaps regulation is mutually beneficial.  By coordinating our efforts, we are providing a model for other regulators and jurisdictions working to implement their G-20 commitments.

To whom we intend to apply our rules

Where a definition has to be given of market participants or infrastructure subject to US or EU jurisdiction, as a matter of principle, it will be construed on a territorial basis, to the extent appropriate.  When foreign entities not affiliated with or guaranteed by US persons are required to register, transaction-level requirements will apply to transactions with US persons and guaranteed affiliates.  For example, EU registered dealers who are neither affiliated with, nor guaranteed by, US persons, would be generally subject only to US transactional rules for their transactions with US persons or US guaranteed affiliates.  Additionally, for market participants that are subject to the requirements of Title VII of the Dodd-Frank Act or EMIR, the CFTC’s Division of Swap Dealer and Intermediary Oversight plans to issue a no-action letter specifying that where a swap/OTC derivative is subject to joint jurisdiction under US and EU risk mitigation rules, compliance under EMIR will achieve compliance with the relevant CFTC rules.

We will not seek to apply our rules (unreasonably) in the other jurisdiction, but will rely on the application and enforcement of the rules by the other jurisdiction.  A possible requirement for certain market participants or infrastructures to register with an authority is acceptable to ensure recourse in the event of a failure to provide satisfactory application or enforcement of rules.

Our regulatory approaches

The EC and the CFTC believe that it is important they should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.

The CFTC seeks to issue final guidance on the cross-border application of its requirements setting out how its rules apply to cross-border swaps activities.  For requirements that are applicable at the entity level, the CFTC has proposed that substituted compliance will be permitted for the requirements applicable in the EU that are comparable to, and as comprehensive as, those applicable in the US.

EU law foresees a system of equivalence. It is based on a broad outcomes-based assessment of the regulatory framework of a third country.  Once equivalence has been determined, infrastructures and firms from that country can access and provide their services across the 28 Member States of the EU under their home jurisdiction rules.  This is expected to be provided for in the relevant forthcoming decisions that the EC can adopt.

Transparency and trading

The CFTC plans to clarify that where a swap is executed on an anonymous and cleared basis on a registered designated contract market (DCM), swap execution facility (SEF), or foreign board of trade (FBOT) the counterparties will be deemed to have met their transaction-level requirements, including the CFTC’s trade-execution requirement.

To date, an FBOT operating pursuant to a direct access no-action relief letter may permit identified members or other participants located in the US to enter trades directly into the trade matching system of the FBOT only with respect to futures and option contracts.  However, an FBOT registered pursuant to Part 48 of the CFTC’s regulations also can list swap contracts for trading by direct access, subject to certain conditions.  In view of the apparent interest on the part of certain FBOTs operating pursuant to the no-action relief in listing swaps for trading by direct access, the CFTC’s Division of Market Oversight plans to amend the no-action letters to permit those FBOTs to list swap contracts, subject to certain conditions.  In the future, registered FBOTs will be permitted to list swap contracts for trading by direct access, subject to the same conditions.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  The CFTC staff will issue no-action letters to this effect. In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will in January 2014 assess progress.

While important EU rules on mandatory trade execution and trading platforms under the Markets in Financial Instruments Directive and Regulation are almost complete, we are working collaboratively to share ideas and ensure harmonization to the maximum extent possible.

We are also working together on similar approaches to straight-through-processing so that market participants and infrastructure in both jurisdictions can benefit from the operational improvements that lower risk to the system.

How we look at risk mitigation rules for uncleared trades

The CFTC and the EU have essentially identical rules in important areas of risk mitigation for the largest counterparty swap market participants. Under the European Market Infrastructure Regulation (EMIR), the EU has adopted risk mitigation rules that are essentially identical to some of the CFTC’s business conduct standards for swap dealers and major swap participants.  In areas such as confirmation, portfolio reconciliation, portfolio compression, valuation, and dispute resolution, our respective regimes are essentially identical.

To achieve that outcome for requirements applicable to transactions, the CFTC’s Division of Swap Dealer and Intermediary Oversight plans to issue a no-action letter specifying that for market participants that are subject to the requirements of Title VII of the Dodd-Frank Act or EMIR, the staff will not recommend any enforcement action against certain covered market participants in cases where those participants comply with the relevant requirements under EMIR, which are deemed to be essentially identical to the requirements imposed by the CFTC.  Where a swap/OTC derivative is subject to joint jurisdiction under US and EU risk mitigation rules, compliance under EMIR will achieve compliance with the relevant CFTC rules.

The EC is conducting, with ESMA, an equivalence assessment of the requirements applicable in the US under the jurisdiction of the CFTC. Where the EC finds the requirements to be equivalent it can allow market participants the choice to comply either with EMIR rules or with the equivalent CFTC rules.

We also are working together with other regulators from around the world to harmonize our rules on margin for uncleared swaps.  In the expectation that those internationally agreed rules will be applied and enforced in a substantially identical manner, this can be reflected in an equivalence decision in the EU, and be the subject of substituted compliance by the CFTC.

Approach to Offshore Guaranteed Affiliates, Branches, and Collective Investment Vehicles

We have a shared goal of ensuring that the overseas guaranteed affiliates and branches of US and EU persons are not allowed to operate outside of important G-20 reforms.

From a CFTC perspective, Dodd-Frank cross-border transaction requirements generally cover swaps between non-US swap dealers and US-persons or guaranteed affiliates of US persons, as well as swaps between two guaranteed affiliates that are not swap dealers. Compliance with transaction requirements for these trades could be satisfied through substituted compliance.  Similarly, foreign branches of US swap dealers may be able to comply with CFTC rules through substituted compliance, as long as the foreign branch is bona fide and the swap is actually entered into by that branch.  Lastly, the definition of US person should include offshore hedge funds and collective investment vehicles that are majority-owned by US persons or that have their principal place of business in the United States.

From an EU perspective, it is equally essential that any unmitigated risks posed in the EU by non-EU entities do not escape regulation. EMIR will cover transactions undertaken between non-EU entities where those transactions pose unmitigated risk that would have a direct, substantial, and foreseeable effect in the EU. It will also cover transactions undertaken by non-EU entities where this is necessary to prevent regulatory evasion. ESMA will publicly consult this month on the types of entities and contracts that should be determined as meeting these criteria. In particular, ESMA will consider whether such unmitigated risks may exist in respect of transactions undertaken by non-EU entities that are guaranteed by EU entities or by EU branches of non EU entities. The EC will then adopt draft Regulatory Technical Standards determining which contracts should be covered by EMIR.

How we approach mandatory clearing

We have essentially identical processes with regard to adopting mandatory clearing obligations.  When the EU adopts its first mandatory clearing determination beginning next year, it is likely to cover the same classes of interest rate swaps and credit default swap indices as the CFTC’s determination.  In terms of which market participants are covered by mandatory clearing, we have broadly similar approaches and have agreed to a ‘stricter-rule-applies’ approach to cross-border transactions where exemptions from mandatory clearing would exist in one jurisdiction but not in the other. This will prevent loopholes and any potential for regulatory arbitrage. With regard to intra-group swaps/derivatives, we have broadly similar approaches with regard to mandatory clearing.

The rules applicable to our DCOs/CCPs

With regard to derivatives clearing organizations (DCOs) and central counterparties (CCPs) that are registered in both the US and the EU, CFTC rules and EMIR are both based on international minimum standards.  We have identified one material difference with regard to our regulatory regimes: initial margin coverage.  We will work together to reduce any prudential concerns or regulatory arbitrage opportunities and to reflect this in our respective decisions on registration and equivalence.

In order to avoid significant market fragmentation and uncertainty around clearing obligations, the EC and the CFTC will endeavour to ensure that those infrastructures will be able to clear swaps/derivatives for their clearing members until registration/recognition has been determined.  The EU can achieve this through the EC’s equivalence decisions and ESMA’s recognition of foreign CCPs, while the CFTC can do this through targeted no-action relief.

Two EU CCPs (LCH.Clearnet Ltd. and ICE Clear Europe) are already registered with the CFTC as DCOs.  Additionally, the CFTC’s Division of Clearing and Risk plans to issue no-action letters to both Eurex Clearing AG and LCH.Clearnet SA  (both of which have pending registration applications with the CFTC) to begin clearing interest rate swaps and/or credit default swap indices for US clearing members.  The CFTC’s Division of Clearing and Risk also has issued no-action letters to two other foreign-based clearing organizations, permitting them and their clearing members to clear, subject to specified conditions, certain swaps that must be cleared by a registered or exempt DCO.  In each case, the time-limited no-action relief expires upon the earlier of December 31, 2013, or the DCO becoming registered with the CFTC.  The CFTC will continue to consider granting no-action relief in similar circumstances where a clearing organization seeks to register as a DCO and has not yet completed the registration process.

Reporting of trades to our trade repositories

For reporting trades to trade repositories, we have determined that our approaches are very similar and we will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws.  We will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

Future collaborative efforts

The EC, ESMA, and the CFTC believe it is important that jurisdictions and regulators should be able to defer to each other where this is justified by the respective quality and enforcement of regulations.

Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief as described herein will be reflected by the CFTC in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership.

For the future, we have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of our respective rules.  We will continue discussions with other international partners with a view to establishing a more generalised system that would allow, on the basis of these countries' implementation of the G-20 commitments, an extension of the treatment the EU and the CFTC will grant to each other.

Brief summary

In response to the financial crisis, the G-20 nations agreed to lower risk and promote transparency in the over-the-counter (OTC) derivatives. The Commodity Futures Trading Commission (CFTC) and the European Commission (EC) share a common objective of a steadfast and rigorous implementation of these commitments.

We have both made significant progress in our regulatory reforms and, as a result of our joint collaborative effort in many places, our final rules are essentially identical. Nonetheless, our regulatory calendars are not always synchronized.

As the market subject to this regulation is international, we acknowledge that,   notwithstanding the high degree of similarity that already exists between our respective requirements, without coordination between us, subjecting this global market to the simultaneous application of our requirements could lead to conflicts of law, inconsistencies, and legal uncertainty. The CFTC and the EC have worked closely and collaboratively to implement our rules and regulations to avoid this to the greatest extent possible and consistent with international legal principles.

Jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.  The CFTC’s approach allows for compliance with entity-based rules through substituted compliance, as well as for transaction-based rules with guaranteed affiliates.  Further, the CFTC plans to clarify that where a swap is executed on an anonymous and cleared basis on a registered designated contract market, swap execution facility, or foreign board of trade the counterparties will be deemed to have met their transaction-level requirements, including the CFTC’s trade-execution requirement.

For bilateral uncleared swaps, because EU and US rules for risk mitigation are essentially identical, CFTC staff plans to issue no-action relief.  In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.

For the trading-execution requirement, the CFTC plans to permit foreign boards of trade that have received direct access no-action relief to also list swap contracts for trading by direct access to avoid market and liquidity disruption.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  The CFTC staff will issue no-action letters to this effect. In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will in January 2014 assess progress.

We continue to work together on similar approaches to straight-through-processing and harmonized international rules on margins for uncleared swaps and have essentially identical processes with regard to adopting mandatory clearing obligations and regulating intra-group swaps/derivatives trades. We also share common goals of ensuring that the overseas guaranteed affiliates and branches of US and EU persons are not allowed to operate outside of important G-20 reforms.

Our approaches for reporting to trade repositories are very similar and we will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws.  We will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

With respect to derivatives clearing organizations (DCOs) and central counterparties (CCPs), CFTC rules and the European Market Infrastructure Regulation are both based on international minimum standards.  CCP initial margin coverage is the only key material difference and we will work together to reduce any regulatory arbitrage opportunities.  We will endeavour to ensure that our DCOs/CCPs that have not yet been recognised or registered will be permitted to continue their business operations.

The EC, the European Securities and Markets Authority, and the CFTC believe it is important that jurisdictions and regulators should be able to defer to each other where this is justified by the respective quality and enforcement of regulations.  Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief as described herein will be reflected by the CFTC in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership.

For the future, we have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of our respective rules.