CFTC implements further trade execution requirements whilst ESMA still grapples with initial stages

Just over one year after the Commodity Futures Trading Commission (CFTC) became the first non-bank financial services regulatory authority to produce its full set of rulings on the new and completely overhauled method of trade execution within the institutional electronic trading industry, the implementation of further requirements relating to swap execution facilities (SEF) has been completed.

In this particular case, the CFTC’s Division of Market Oversight (Division) announced yesterday that the trade execution requirement for certain interest rate and credit default swaps will now be set in place. The Division previously provided no-action relief for certain swaps required to be traded on a swap execution facility (SEF) or designated contract market (DCM) to the extent that those swaps were part of a package transaction. The Division has determined that further relief is appropriate to enable market participants the necessary time to fully comply with the trade execution requirement with respect to swap components of certain categories of package transactions.

Market participants will also have the opportunity to transition their trading of these swap components onto SEFs and DCMs.

Meanwhile, on the other side of the Atlantic, the European Securities and Markets Authority (ESMA) has today published a consultation paper on the revision of the Regulatory Technical Standards (RTS) and implementing technical standards (ITS) in relation to the European Market Infrastructure Regulation (EMIR), demonstrating that the pan-European regulator has a substantial amount of ground to make up in order to achieve the proposed global trade reporting and execution standards that lawmakers and leaders of the G20 countries envisage to make cross-border standardization of regulatory procedures possible.

The ESMA RTS/ ITS deal with the obligation of counterparties’ and CCP’s to report to trade repositories. Since the entry into force of the RTS and ITS, ESMA has worked on ensuring their consistent application. The practical implementation of EMIR reporting showed some shortcomings and highlighted particular instances for improvements so that the EMIR reports better fulfil their objectives. ESMA revised standards propose to clarify the interpretation of the data fields needed for the reporting to trade repositories and the most appropriate way of populating them.

ESMA will consider stakeholder’s feedback to the proposed revised standards by  February 13, 2015, therefore setting Europe’s rulings on trading infrastructure almost two years behind that of the United States, where Senate Commission panel hearings of this nature were taking place in early 2013.

To give an insight into the timeline, during an industry panel discussion in London in July last year regarding central counterparty implementation and the use of SEFs, which included senior executives from ICAP’s market infrastructure for post-trade processing and risk management division Traiana and ForexClear’s CEO Gavin Wells, the subject of how to realistically work out the means of setting up a clearing system for FX and FX options, as well as NDFs and other OTC instruments was discussed.

During that discussion, Jacqueline Liau, FX Prime & Global Head, Product and Service at HSBC had stated “This may be 2014 in the US, and a bit later in Europe. Hong Kong and Singapore have put it back, I expect it to be probably effective in those regions at the end of 2014. On this basis, we are unlikely to see much SEF activity in FX for some time.” With the consultation process extending to 2015, ESMA has taken longer than had been anticipated.

In the case of the CFTC’s new implementation of trade execution requirements for CDS and interest rate swaps, the Division has tailored the relief by category—for example, SEFs and DCMs are provided with flexibility in offering methods of execution for swap components of certain package transactions via their trading systems, facilities, or platforms. Finally, with respect to certain categories of package transactions, the time-limited relief will enable the Division to gather data not previously available to the agency to further assess whether SEFs and DCMs can appropriately offer the capability to transact swap components of such package transactions via competitive means of execution.

Accordingly, the Division is issuing today CFTC No-Action Letter No. 14-137, providing a phased compliance timeline which can be viewed by clicking here.

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