January 2017

Updates on legislative and regulatory developments in derivatives markets

Inside the Beltway

House Passes CEA Reauthorization Bill – On January 12, the House passed H.R. 238, the Commodities End-User Relief Act, which reauthorizes the Commodities Futures Trading Commission (CFTC) through FY 2021, as well as make basic reforms to improve the functioning of the CFTC, in a 239-182 vote. The House also passed an inter-affiliate amendment sponsored by Rep. Frank Lucas (R-Okla.), which includes language to clarify exemptions from swap rules, as well as requirements for reporting, risk management, and anti-evasion as it relates to such transactions.
SIFMA Letter of Support for H.R. 238 | Joint Trades Letter of Support for the Lucas Amendment

SEC Chair Nominee Announced – On January 4, President-elect Donald Trump announced his plan to nominate Jay Clayton to lead the Securities and Exchange Commission (SEC). Clayton is currently a partner at New York law firm Sullivan & Cromwell.

CFTC Chairman Announces Resignation - On January 3, Commodity Futures Trading Commission’s (CFTC) Chairman Massad announced that he will be stepping down on January 20 with the end of the Obama administration. According to the CFTC, Massad will stay on as a commissioner for a few weeks after to tie up administrative items. President-elect Trump will appoint the next Chairman.
Statements from Chairman Massad, Commissioner Giancarlo and Commissioner Bowen

CFTC MRAC Meeting on CCP Risk Management Issues – On November 17, the CFTC’s Market Risk Advisory Committee held ameetingto discuss central clearing counterparty (CCP) risk management issues. David Bailey, Director of Financial Market Infrastructure at the Bank of England, shared the authority’s key findings from its CCP fire drill in February 2016, which included: 1) the “broadly positive” extent to which clearing members were able to second in trade with multiple CCPs; and 2) the “considerable variation” in members’ capacity to participate effectively in auction files at two CCPs at the same time; and 3) prerequisites for running more effective fire drills across multiple CCPs. The MRAC approved the CCP Risk Management Subcommittee’s recommendations for CCP default management. 

HFSC Hearing with SEC Chair White – On November 15, the House Financial Services Committee (HFSC) held a hearing examining the SEC’s agenda, operations and fiscal year 2018 budget request. Rep. David Scott (D-Ga.) stated that he had been assessing the numerous rules surrounding derivatives, and asked about the status of agreeing to equivalence with European Union standards, and how Brexit might influence the issue. White said the SEC’s cross-border proposal is under the rubric of substituted compliance, and that the CFTC has been more involved in discussions with the EU. She added that Brexit is “still sorting itself out.”
Chair White testimony | Statements from Chair Jeb Hensarling (R-Texas) and Ranking Member Maxine Waters (D-N.Y.)

CFTC Open Meeting on Reg AT – On November 4, the CFTC held an open meeting on the supplemental Regulation AT (Reg AT) proposal. Commissioner Giancarlo argued that the proposal is “at odds” with the U.S. government’s efforts to the prevent the Chinse from implementing new cybersecurity laws that could force technology companies to give up their own proprietary source codes. He also raised concerns about property owner rights and the protection of source code information. Commissioner Bowen suggested that the CFTC consider instituting pilot programs in small segments of the market to assess the effects of additional and more substantial restrictions on algorithmic trading. The Commission voted 2-1 to approve the supplemental notice of proposed rulemaking for Regulation AT. Comments are due by January 24, 2017.  A joint trade extension request (signed by SIFMA and SIFMA AMG) was submitted on December 7, 2016.

CFTC Roundtable on CCP Resiliency and Recovery – On October 6, CFTC staff held a public roundtable on CPMI-IOSCO Guidance on CCP resiliency and recovery. CFTC Chairman Massad highlighted the ongoing international and domestic efforts focused on CCP resiliency, recovery and resolution, and that these issues are a top priority at the Commission. Panelists discussed concerns regarding liquidity and pro-cyclical impacts, in addition to impacts of other banking regulations, such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, and limitations as to what is considered a “high quality liquid asset.” Panelists noted more clarity was needed regarding CCP governance board responsibilities, arguing that while “oversight” may be appropriate, interpretations requiring responsibility for “day-to-day” activities were concerning.

SEC Open Meeting on Clearing Agencies and Shortened Settlement Cycles – On September 28, the SEC held an open meeting where the Commission unanimously approved both a final rule on enhanced clearing agency standards and proposed amendment to the clearing agency definition, as well as an amendment to move from a T+3 to T+2 settlement cycle. Commissioner Stein opined that the rules being considered regarding covered clearing agencies were a “missed opportunity” to strengthen the oversight, and that she hopes market participants provide additional comment suggesting ways to improve upon the releases. Chair White and Commissioners Stein and Piwowar all voiced their support for a shortened settlement cycle, explaining that it will reduce risk in the markets, and asked market participants to comment on even shorter settlement cycles, such as T+1.

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Notable Speeches

On January 10, CFTC Chairman Massad delivered a speech on financial reform.

On January 6, HFSC Chair Hensarling (R-TX) announced HFSC leadership for the 115th Congress.

On January 4, HFSC Ranking Member Waters (D-CA) and SBC Ranking Member Brown (D-OH) issued statements regarding President-Elect Trump’s nomination of Jay Clayton to serve as SEC Chair.

On January 3, the CFTC announced that Chairman Massad would be resigning, effective January 20, 2017 (see statements from the Chairman and Commissioners Bowen and Giancarlo; CFTC listing of accomplishments during Massad’s term).

On December 6, CFTC Chairman Massad delivered a speech on Brexit and the derivatives market, among other topics.

On November 21, the SEC announced that Division of Trading Markets Director Stephen Luparello will be leaving the agency by the end of the year, and Heather Seidel will serve as Acting Director.

On November 18, House Agriculture Committee Chair Conaway (R-TX) sent a letter to CFTC Chairman Massad regarding regulatory rulemaking during the final weeks of President Obama’s administration (see Press Release).

The Financial Stability Oversight Council (FSOC) held an open meeting on November 16 to discuss alternative reference rates and CFTC CCP stress tests.

On November 15, SEC Chair White announced her departure plans.

On November 14, CFTC Chairman Massad delivered remarks discussing several derivatives-related topics, as well as possible areas of focus moving forward.

On November 9, President-Elect Donald Trump released an update on financial services reform plans.

On October 21, CFTC Chairman Massad delivered a speech on derivatives-related priorities, to include uncleared swaps margin, swap dealer capital requirements, Reg AT, trading requirements, and the FSOC asset management project.

On October 19, CFTC Chairman Massad delivered a speech on derivatives-related priorities, to include margin for uncleared swaps, swap dealer capital requirements, automated trading, cyber threats, trading requirements, data reporting, clearing house resilience recovery and resolution planning, and position limits.

On October 5, CFTC Commissioner Giancarlo released a podcast on financial regulation.

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Media Recap

BN: Draghi Calls for ECB Oversight of U.K. Clearing After Brexit, John Detrixhe and Silla Brush, 1/11/17

WSJ: Outgoing CFTC Chief Warns Against Rollback of Postcrisis Financial Overhauls, Nina Trentmann, 1/10/17

WSJ: House to Act on Bill to Target ‘Position Limits’ Rules on Commodities Trading, Andrew Ackerman, 1/9/17

NYT: Trump Nominates Wall Street Lawyer to Head S.E.C., Leslie Picker, 1/4/17

WSJ: CFTC Chairman Timothy Massad to Step Down Jan. 20, Dave Michaels and Andrew Ackerman, 1/3/17

WSJ: Dealers Increasingly Route Derivatives to Clearinghouses, Survey Says, Andrew Ackerman, 12/29/16

WSJ: EU Endorses Overseas Clearinghouses to Promote Banks? Cross-Border Business, Julia-Ambra Verlaine, 12/16/16

MLex: CFTC should delay automated-trading comment deadline until Massad leaves, banks say, Neil Roland, 12/15/16

WSJ: CFTC Votes Unanimously to Repropose Position Limits Rules, Andrew Ackerman, 12/5/16

WSJ: EU Finalizes MiFID II Rulebook With Derivatives Trading Cap, Julia-Ambra Verlaine, 12/1/16

WSJ: EU to Demand Clearinghouses Provide Plans on Avoiding Taxpayer Bailouts, Julia-Ambra Verlaine, 11/28/16

Politico: Conaway calls on CFTC to stop writing rules, Patrick Temple-West, 11/18/16

Reuters: CFTC: 'too-big-to-fail' clearinghouses resilient to shocks, John McCrank, 11/16/16

WSJ: Wall Street Frets About Cybersecurity as U.S. Demands More Data, Andrew Ackerman, 11/8/16

The Hill: Battle lines drawn over automated trading rule, Timothy Weatherhead, 11/3/16

WSJ: Traders to Get Relief Under CFTC Plan Aimed at Curbing Market Disruptions, Dave Michaels and Alexander Osipovich, 10/21/16

The Hill: CFTC extends de minimis threshold by one year, Timothy Weatherhead, 10/13/16

The Hill: CFTC rule seeks to clarify cross-border swap issues, Timothy Weatherhead, 10/11/16

Finance Magnates: CFTC Extends Temporary Relief to SEFs for Block Trades, Aziz Abdel-Qader, 10/7/16

FT: New SEC standards may level playing field for European banks, Philip Stafford, 9/28/16

WSJ: Senate Panel Unanimously Approves CFTC Nominees, Andrew Ackerman, 9/28/16

Risk.net: Loan danger: CFTC sees systemic risk in margin financing, Peter Madigan, 9/23/16

Reuters: U.S. automated trading proposal out of date: CFTC commissioner, Lisa Lambert, 9/21/16

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Dodd-Frank Corner

Recent Regulatory Action

On January 13, the CFTC unanimously approved proposed amendments to Swap Data Access rules 49 and certain other matters, as well as Part 3 and Part 9 in two separate proposals (comments due 60 days after publication in the Federal Register; Fact Sheet; Statement of Chairman Massad).  

On January 12, the CFTC proposed amendments to recordkeeping requirements under Regulation 1.31 (comments due 60 days after publication in the Federal Register; Press Release; Statement from Chairman Massad.

On January 9, the SEC released a Notice of Filing of a FINRA Proposed Rule to extend the expiration date of FINRA Rule 0180, regarding the application of SBS requirements, to February 12, 2018 (comments due 21 days after publication in the Federal Register).

On January 4, the OCC released a report on bank trading and derivative activity for 3Q 2016.

On December 30, the CFTC published its Re-Proposal on Position Limits for Derivatives (comments due by February 28, 2017).

On December 23, the CFTC released a Staff Interpretation regarding SD political contributions.

On December 19, the CFTC issued No-Action Relief on swaps clearing by “Relief” DCOs (see Letter 16-85; Press Release) and cleared swaps reporting obligations (see Letter 16-86; Press Release).

On December 16, the CFTC published its Re-Proposed Rule on Capital Requirements for Swap Dealers and MSPs (comments due March 16, 2017) (see Press Release; Fact Sheet; Q&A; Statements from Chairman Massad and Commissioner Giancarlo).

Also on December 16, the CFTC published its Final Rule on Aggregation of Positions (effective February 14, 2017).

On December 15, the CFTC issued No-Action Relief from required clearing for affiliated counterparties in Australia and Mexico (see Press Release).

On December 12, the CFTC published an Order excluding farm credit institution systems from the CEA’s definition of CTA (effective December 12, 2016).

On December 6, the CFTC’s OIG released its Semi-Annual Report to Congress.  The SEC’s OIG Semi-Annual Report was released on December 1.

On December 1, the OFR released a Working Paper on contagion in the CDS market.

On November 30, the CFTC issued No-Action Relief for FCMs and IBs regarding the use of consolidated risk disclosure statements for non-institutional customers (see Press Release).

Also on November 30, the CFTC’s OIG released a Report on Compliance with DATA Act of 2014 Readiness Review.

On November 28, the CFTC extended No-Action Relief from clearing and trade execution requirements for certain affiliated counterparties to December 31, 2017, subject to other Commission actions as detailed in the releases (see Press Release).

On November 25, the CFTC published a supplementary Proposal on Reg AT (comments due January 24, 2017) (see Press Release; Fact Sheet; Q&A; statements from Chairman Massad and Commissioner Bowen; dissenting statement from Commissioner Giancarlo).

Also on November 25, the CFTC published a Final Rule on CPO financial reports (effective December 27, 2016) (see Press Release).

On November 21, the CFTC extended No-Action Relief for certain non-US Swap Dealers from certain Part 45/46 reporting requirements, until the earlier of December 1, 2017 or a comparability determination for a respective jurisdiction (Press Release).

Also on November 21, the CFTC released a Final Rule on CPO financial reports (effective 30 days after publication in the Federal Register) (see Press Release).

On November 17, the CFTC’s Office of Inspector General released an Audit Report on the Commission’s 2016 financial statements and customer protection fund.

On November 16, the CFTC published a Final Rule amending the timing for filing of CCO annual reports for certain registrants, effective as of publication (see Press Release).

Also on November 16, the CFTC released the results of supervisory stress tests of clearinghouses (see Press Release; Q&A).

On November 16, the CFTC’s DMO issued a reminder to market participants regarding the upcoming expiration of No-Action Relief regarding ownership and control final rules.

On November 4, the CFTC approved a Supplemental Proposed Rule on Reg AT (comments due 60 days after publication in the Federal Register) (see Press Release; Fact Sheet; Q&A; statements from Chairman Massad and Commissioner Bowen; dissenting statement from Commissioner Giancarlo).

On November 2, the CFTC announced a counterpart to a 2014 MOU with Canadian authorities relating to cooperation and information exchange in the supervision and oversight of regulated entities that operate on a cross-border basis in the US and Canada.

Also on November 2, the CFTC published a Renewal of a Proposed Information Collection regarding practices by former members/employees of the CFTC (comments due by January 3, 2017).

On November 1, the CFTC announced an extension of time-limited No-Action Relief regarding exemptions from trade execution requirements for certain package transactions until November 17, 2017 (see Press Release).

Also on November 1, the SEC’s Division of Economic and Risk Analysis released a memorandum related to the Commission’s proposed rule on the use of derivatives by registered funds and business development companies, making additional economic analysis available (see Press Release).

On October 31, the CFTC issued an Order granting registration for five foreign boards of trade permitting trading by direct access from the US: EurexDeutscheland; CME Europe; ICE Futures Europe; London Metal Exchange; and London Stock Exchange (see Press Release).

On October 26, the CFTC published a Renewal of a Proposed Information Collection on the final rules for cleared swap recordkeeping and reporting requirements (comments due November 25, 2016).

On October 24, the CFTC published an Order exempting certain transactions of Southwest Power Pool and amending a previous RTO-ISO Order from 2013 (see Press Release; statements from Chairman Massad and Commissioner Giancarlo).

On October 18, the CFTC published a Proposed Rule and Interpretations on the “Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants (comments due December 19, 2016) (see Press Release; Fact Sheet; Statements from Chairman Massad and Commissioners Bowen and Giancarlo).

Also on October 18, the CFTC published an Order establishing the termination of the current de minimis phase-in date as December 31, 2018 (see statements from Chairman Massad and Commissioner Bowen).

Also on October 18, the CFTC issued a Staff Advisory to FCMs regarding investments in money market funds.

On October 17, the FDIC published a Final Rule on Regulatory Capital Rules, Liquidity Coverage Ratio: Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions (effective October 17, 2016).

On October 14, the CFTC published a Final Rule expanding the clearing mandate for IRS (effective December 13, 2016) (see Press Release; Statement from Chairman Massad; Q&A).

On October 13, the SEC published a Final Rule on establishing enhanced standards for the operation and governance of covered clearing agencies (effective December 12, 2016; compliance date of April 11, 2017), as well as a proposal to apply such enhanced standards to other categories of securities clearing agencies (comments on Proposed Rule Amendments due by December 12, 2016) (see Press Release). 

On October 7, the CFTC extended temporary no-action relief for SEFs from the “occurs away from” block trade requirements until November 15, 2017 (see Press Release).

On October 6, the CFTC and UK FCA announced an MOU to enhance supervision of cross-border regulated firms (see Press Release).

On October 5, the SEC published an Order extending temporary exemptions from compliance with certain SBSDR requirements until April 1, 2017.

On October 4, the OCC release a report on bank trading and derivatives activity for 2Q 2016 (see Press Release).

On September 28, the CFTC unanimously approved a Final Rule expanding the clearing mandate for IRS (see Press Release; Statement from Chairman Massad; Q&A).

Also on September 28, the SEC unanimously approved a Final Rule on establishing enhanced standards for the operation and governance of covered clearing agencies, as well as a proposal to apply such enhanced standards to other categories of securities clearing agencies (see Press Release).  The Commission also approved proposed amendments to the securities transaction settlement cycle (comments due December 5, 2016).

On September 23, the CFTC published a Renewal of its Proposed Information Collection on SEF Core Principles (comments due October 24, 2016).

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SIFMA Comment Letters

On December 18, SIFMA and the Institute of International Bankers (IIB) submitted a comment letter regarding the cross-border application of the registration thresholds and external business conduct standards applicable to swap dealers and major swap participants. SIFMA also joined a high level multi-trade response, in coordination with the ABA, Coalition for Derivatives End-Users, FSR, ISDA, NACT and US Chamber Center for Capital Markets.

On December 7, SIFMA and the SIFMA Asset Management Group, with the Futures Industry Association (FIA), FIA Principal Traders Group (FIA PTG), International Swaps and Derivatives Association (ISDA), Managed Funds Association (MFA), U.S. Chamber of Commerce, Center for Capital Markets Competitiveness (CCMC), and the Commodity Markets Council’s (CMC) submitted a comment letter to the CFTC requesting a 180-day extension of the comment deadline for the supplementary Reg AT proposal.

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International Updates

On December 22, ESMA released a Peer Review on CCP margin and collateral requirements (see Press Release).

On December 19, ESMA released updated Q&As on MiFID II/MiFIR transparency, market structure and commodity derivatives.

On December 16, the European Commission adopted implementing decisions on equivalence for several CCPs in Brazil, Dubai, India, Japan, New Zealand and UAE; the EC also adopted decisions on equivalence for trading venues in Australia, Canada, Japan and Singapore (see Press Release).

On December 14, ESMA released an updated list of recognized third country CCPs.

On December 8, the European Commission published notice of an extension of the CRR transitional period for exposures to CCPs to June 15, 2017.

On December 1, the European Commission adopted Delegated Regulations on Position Limits.

On November 29, the FSB released responses to its Discussion Note on CCP resiliency.

On November 28, the European Commission released a proposal on CCP recovery and resolution (see Press Release; FAQ; statement from Vice President Dombrovskis).

On November 23, the European Commission released a communication of results of its call for evidence on EU financial services (also see staff working document).

On November 18, ESMA released updated MiFID and MiFIR Q&A’s.

On November 15, ESMA released an opinion on a common supervisory approach for CCPs.

On November 10, ESMA released a consultation paper on Draft RTS on package orders (comments due January 3, 2017).

On October 28, IOSCO released a report on the implementation of G20/FSB recommendations relating to securities markets (see Press Release).

On October 26, the European Parliament and Council indicated their non-objection to the EU Margin RTS adopted by the European Commission.

On October 19, CPMI/IOSCO released a joint consultation on the Harmonization of Critical OTC Derivatives Data Elements (other than UPI/UTI) (comments due November 30, 2016) (see Press Release).

On October 11, ESMA released its 2017 Work Progamme.

On October 10, ESMA released Guidelines and a Final Report on Transaction Reporting, Order Record Keeping and Clock Synchronisation under MiFID II (see Press Release).

Also on October 10, ESMA released a Q&A on MiFID II investor protections (see Press Release).

On October 4, the European Commission adopted a Delegated Regulation on margin requirements for uncleared derivatives (see Press Release; Annex).

On September 30, ESMA released a Final Report on commodity derivatives inside information.

On September 29, the FCA released a consultation paper on MiFID II implementation.

On September 20, ESMA released a discussion paper regarding trading obligations for derivatives under MiFIR (comments due November 21, 2016).

On September 19, ESMA released an updated list of CCPs authorized under EMIR.

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Status of Derivatives-Related Bills

SEC Approves Final Rules on Cross-Border Securities-Based Swap DefinitionsH.R. 238: The Commodity End-User Relief Act would reauthorize the CFTC through 2021, and amend the Commodity Exchange Act to direct futures associations to require their merchant members to meet certain procedural and reporting requirements. The bill exempts some entities from clearing requirements applicable to swaps. The bill requires the CFTC to publish a cost-benefit analysis of any new regulatory actions, and other provisions.
Status: Passed the House of Representatives by a vote of 239-182 on January 12, 2017.

H.R. 5054: The Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2017, includes a $250 million budget for the CFTC, the same as the 2016 enacted level and $80 million below the President’s budget request. Included in the bill is Section 765, which states that no funds may be used to pay the salaries and expenses of personnel to lower the de minimis quantity of swap dealing to less than $8 billion.
Status: Passed the House Agriculture Subcommittee on April 13, 2016 and the House Appropriations Committee on April 19, 2016.

H.R. 5485: The Financial Services and General Government Appropriations Act, 2017, includes a $1.5 billion budget for the SEC, $50 million below the FY 2016 enacted level and $226 million below the President’s budget request. Included in the bill is the Financial Institution Bankruptcy Act, which makes changes to the U.S. bankruptcy code to facilitate the orderly and efficient resolution of a failing financial firm.
Status: Passed the House Subcommittee on May 25, 2016, Full Committee on June 9, 2016, and House floor on July 7, 2016.

S. 3067: The Financial Services and General Government Appropriations Act, 2017, includes a $1.6 billion budget for the SEC and $250 million for the CFTC, the same as the FY2016 spending levels for each agency.
Status: Passed the Senate Subcommittee on June 15, 2016 and Full Committee on Appropriations on June 16, 2016.

S. 3118/H.R. 5592: The Derivatives Oversight and Taxpayer Protection Act, a bill to amend the Commodity Exchange Act to clarify which fees the Commodity Futures Trading Commission may assess and collect, and for other purposes.
Status: S. 3118 was introduced in the Senate and referred to the Senate Agriculture Committee on June 29. H.R. 5592 was introduced in the House on June 28, 2016 and referred to the House Committees on Judiciary, Financial Services, and Agriculture on June 28, 2016. It was then referred to the House Ag Subcommittee on Commodity Exchanges, Energy, and Credit on July 14, 2-16.

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CONGRESSIONAL CALENDAR

House
In Session: January 3-6, 9-13, 20, 23-25, 30-31; February 1-3, 6-8, 13-17, 27-28; March 1-2, 7-10, 14-17, 20-23, 27-30.

Senate
In Session: January 3-6, 9-13, 17-20, 23-27, 30-31; February 1-3, 5-10, 13-17, 27-28; March 1-3, 6-10, 13-15, 20-24, 27-31.

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SIFMA News and Events

FIA-SIFMA AMG Asset Management Derivatives Conference
February 6-8, Laguna Beach, CA
StubHub President to Keynote FIA/SIFMA Asset Management Derivatives Forum - FIA and SIFMA Asset Management Group come together once again in 2017 to host a comprehensive review of the most critical derivatives issues facing the buy-side. Join us for expert-led sessions focusing on global regulation, operations, markets and trading, and legal and compliance and more.

120 Broadway, 35th Floor, New York, NY 10271 | 212.313.1000

1101 New York Avenue, NW, 8th Floor, Washington, DC 20005 | 202.962.7300

www.sifma.org



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