May 2017

Updates on legislative and regulatory developments in derivatives markets

Inside the Beltway

House Financial Services Committee Sends Financial CHOICE Act to the House – On May 4, the House Financial Services Committee concluded their markup of H.R. 10, the Financial CHOICE Act of 2017. While none of the Democratic amendments offered were agreed to, the manager’s amendment offered by Chairman Jeb Hensarling (R-Texas) passed in a voice vote, and the bill was favorably reported to the House in a 34-26 party line vote. The manager’s amendment includes Section 871, Commissions review and harmonization of rules relating to the regulation of over-the-counter swaps, and Section 872, Treatment of transactions between affiliates.

CFTC Requests Public Input on Project KISS to Simplify Rules - The Commodity Futures Trading Commission (CFTC) has announced it will seek public input on “simplifying and modernizing” its rules, following up on statements from Acting Chair Chris Giancarlo regarding the “Project KISS”.  The Press Release notes, “… this exercise is not about identifying existing rules for repeal or even rewrite. It is about taking CFTC’s existing rules as they are and applying them in ways that are simpler, less burdensome and less of a drag on the American economy.” Suggestions must be received by September 30, 2017.  Comments can be submitted by emailing or visiting cftc.gov/projectkiss

House Financial Services Committee Holds a Hearing on the Financial CHOICE Act – On April 26, the House Financial Services Committee held a hearing on H.R. 10, the Financial CHOICE Act of 2017. Rep. Trey Hollingsworth (R-Ind.) commented on Title VII of the Dodd-Frank Act and asked how it may change the way clearing houses are structured. The Heritage Foundation’s Dr. Norbert Michel replied that mandating the clearing of derivatives is a "very bad idea," as it will concentrate all the risk into the clearing houses, which will then have a direct line to the Federal Reserve. Rep. Gwen Moore (D-Wisc.) asked about the impact of the CHOICE Act on the regulatory oversight of clearing houses, given that the bill repeals Title I of the Dodd-Frank Act. University of Michigan Law School’s Michael Barr said that Congress would need to pass new legislation to ensure stability in clearing houses, and require heightened liquidity standards for clearing houses to prevent market failure.

CFTC Holds a Meeting of the Market Risk Advisory Committee - The CFTC’s Market Risk Advisory Committee held a meeting on April 25 to discuss the staff’s response to the Central Counterparty Risk Management Subcommittee’s recommendations, cybersecurity trends and how well the derivatives markets are currently functioning. Citigroup’s Biswarup Chaterjee noted that he believed there was room for improvement in the CFTC’s Swap Execution Facility (SEF) regime, including the need for cross-border harmonization. When asked to discuss the application of the leverage ratio and its effect on market efficiency and liquidity, Chatham Financial’s Luke Zubrod explained that central clearing has become expensive in part due to the leverage ratio, and clearing firms must bear costs that result in higher minimum fees being passed on to the buy-side.  He suggested that the expansion of clearing and margin exceptions for end-users would limit the universe that the high cost of clearing would impact.

Senate Banking Committee Hearing on the Nomination of Jay Clayton for SEC Chairman – On March 23, the Senate Banking Committee held a nomination hearing for Jay Clayton to serve as Chairman of the Securities and Exchange Commission (SEC). At the hearing, Clayton was asked about his ideas for capital formation how to increase the number of public companies in the U.S. Clayton also discussed his thoughts on regulatory reform, and was quizzed by Senate Democrats on possible conflicts of interest related to his past representations of financial institutions. On April 4, the Committee voted 14-8 in approving his nomination, and on May 2, the Senate voted 61-37 in favor of his confirmation. Clayton was sworn in as SEC Chairman on May 4.

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Notable Speeches

On May 10, CFTC Acting Chair Christopher Giancarlo delivered a speech on regulatory priorities and coordination.

On May 2, Senate Finance Committee Ranking Member Wyden (D-OR) introduced the Modernization of Derivatives Tax (MODA) Act of 2017.

On April 12, the CFTC announced N. Charles Thornton III as Director of the Office of Legislative Affairs.

On April 6, Treasury and the EC issued a joint statement on the U.S.-EU Joint Financial Regulatory Forum held on March 28–29, 2017 in Brussels, Belgium.

On April 5, CFTC Commissioner Bowen delivered a speech on financial regulation.

On April 4, the Senate Banking Committee held an executive session to vote on the nomination of Jay Clayton to be a Member of the SEC.

On April 3, the CFTC announced Andrew B. Busch as the Commission's first Chief Market Intelligence Officer, effective April 10, 2017.

On March 30, CFTC Acting Chair Giancarlo delivered a speech on derivatives priorities.

Also On March 30, the CFTC announced James McDonald as Director of the CFTC's Enforcement Division.

On March 27, 2017, SEC Acting Chairman Michael Piwowar delivered a speech on the core mission of capital markets regulators at the 27th International Institute for Securities Market Growth and Development in Washington, D.C.

On March 20, Senate Banking Committee Chair and Ranking Member Brown issued a press release requesting feedback on proposals to increase economic growth.

On March 15, CFTC Acting Chair Giancarlo delivered a speech in which he laid out his priorities for the Commission.

On March 14, President Trump announced his intent to nominate key administration posts, including Commissioner Giancarlo as Chairman of the CFTC.

Also on March 14, CFTC Commissioner Bowen delivered a speech touching on several Title VII related issues, including Reg AT and position limits.

On March 10, the Department of the Treasury announced Senior Staff/Counselor appointments.

On March 6, the CFTC announced Daniel Davis as General Counsel.

On February 24, President Trump released an Executive Order on regulatory reform (see statement; Press Release).

Also on February 24, CFTC Commissioner Bowen delivered a speech on diversity in financial services.

On February 13, Steven T. Mnuchin was sworn in as Treasury Secretary.

Also on February 13, CFTC Commissioner Bowen delivered a speech on market trends.

On February 10, Daniel Tarullo submitted his resignation as a member of the Board of Governors of the Federal Reserve (effective April 5, 2017).

On February 8, the Federal Reserve announced that General Counsel Scott Alvarez will retire by the end of the year.

On February 3, President Trump issued an Executive Order on “Core Principles for Regulating the United States Financial System”.

On January 30, CFTC Commissioner Bowen delivered a speech touching on several Title VII topics, including Reg AT and Position Limits.

On January 27, the CFTC announced that Amir Zaidi as Director of DMO, Vince McGonagle as Acting Director of Enforcement, Jeffrey Bandman as FinTech Advisor and John Lawton as Acting Director of DCR.

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Media Recap

Reuters: UK's Hammond warns moving clearing out of UK carries risks, Hannah McKay, 5/4/17

Reuters: EU to give itself tougher powers over euro clearing after Brexit – source, Toby Melville, 5/3/17

Reuters: EU to Ease Derivatives Rules, Holds Fire on Euro Clearing Changes, Huw Jones, 4/28/17

MLex: Regulators to get guidance for derivatives CCP stress tests, Neil Roland, 4/26/17 

Risk.net: Fear of something worse seen as key to CCP recovery, Duncan Wood, 4/24/17

Reuters: With Brexit, location of derivatives clearing is key issue: EU's Dombrovskis, Francesco Guarascio, 4/6/17

FT: Clearing houses see record volume as new rules boost activity, Philip Stafford and Hannah Murphy, 4/5/17

FT: Ovation for new CFTC chief reflects hopes, raises risks, Gregory Meyer and Philip Stafford, 3/16/17

Risk.net: CCP chiefs warn on clearing provision capacity, Robert Mackenzie Smith, 3/16/17

Law360: CFTC Chair Nominee Urges Scaling Back 'Flawed' Regs, Tom Zanki, 3/15/17

Risk.net: Vague VM relief criteria creates trading uncertainty, Nazneen Sherif, 2/28/17

P&I: U.S., European regulators relax on enforcing margin rules for some, Rick Baert and Sophie Baker, 2/23/17

Reuters: BoE's Cunliffe says euro-denominated clearing should not be forced into euro zone, Huw Jones, 2/22/17

Reuters: U.S. regulator gives grace period for swaps collateral rule, Lisa Lambert, 2/13/17

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Dodd-Frank Corner

Recent Regulatory Action

On May 3, the CFTC announced it would seek public input on simplifying and modernizing Commission rules (“KISS” Initiative) (comments due by September 30, 2017) (see Press Release).

Also on May 3, the CFTC released Proposed Amendments to certain Chief Compliance Officer duties and Annual Report requirements for SDs/MSPs/FCMs (comments due July 7, 2017) (see Press Release).

On April 28, the CFTC published a Notice of Adoption of Revised Registration Form 8-R (the application form that individuals must use to register as an AP of a registrant, floor broker, or floor trader, or to be listed as a principal of a registrant).

On April 18, the CFTC’s DSIO extended No-Action Relief (17-22) for SDs doing business in the EU regarding compliance with margin requirements until November 7, 2017 (see Press Release).

On April 14, the CFTC's OIG released a Report on the OIG Risk Assessment of the Commission’s Purchase Card and Convenience Check Program.

On April 10, the SEC published in the Federal Register an Order granting a temporary exemption to Covered Clearing Agencies from compliance with Rule 17Ad–22(e)(3)(ii) and certain requirements in Rules 17Ad–22(e)(15)(i) and (ii) under the Securities Exchange Act of 1934 until December 31, 2017.

On April 6, the SEC published in the Federal Register an Order extending a temporary exemption from compliance with Rules 13n–1 to 13n–12 under the Securities Exchange Act of 1934 until the later of (i) May 1, 2017 or (ii) for any SDR applicant that files with the SEC prior to May 1, 2017 amendments to its pending SDR application, September 29, 2017.

On March 24, the CFTC's DMO issued a No-Action Letter (17-17) extending relief associated with swap trade confirmations until the effective date of any revised CFTC regulations regarding trade confirmation requirements (see Press Release).

On March 23, the OCC released a report on Bank Trading and Derivatives Activities for Fourth Quarter 2016 (see Press Release).

On March 10, the CFTC’s DMO issued a No-Action Letter (17-16) extending time-limited relief regarding the masking of certain identifying information required to be reported (see Press Release).

On February 23, the Federal Reserve and OCC issued guidance regarding March 1 variation margin implementation (see Press Release).
 
On February 23, the CFTC’s DSIO issued a No-Action Position (17-13) on the timing of the posting and collection of Variation Margin from certain counterparties operating in Japan.

On February 22, the NFA announced a rule submission to the CFTC regarding proposed SD/MSP reporting requirements.

On February 21, the OFR released a working paper, “Persistence and Procyclicality in Margin Requirements”.

On February 15, the SEC published an Interim Final Rule providing certain exemptions for SBS under the ’33 Act, ’34 Act and Trust Indenture Act, expiring on February 11, 2018 (effective upon publication).  Previously, on January 25, the SEC published an Order extending temporary exemptions for the treatment of SBS as Securities under the ’34 Act to February 5, 2018; and on January 12, the SEC published 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.

On February 13, the CFTC’s DSIO released the following (see Press Release; Statement from Acting Chair Giancarlo): 1) Time-Limited No-Action Position (17-11) for failure to collect and/or post variation margin between March 1 to September 1, 2017 (also see Q&A; Statement from Acting Chair Giancarlo); and 2) No-Action Position (17-12) for minimum transfer amount with respect to separately managed accounts.

On February 12, the OFR released a working paper, “Persistence and Procyclicality in Margin Requirements”.

On February 6, the CFTC’s DMO extended time-limited No-Action Relief (17-06), stating that from Feb. 14, 2017 to Aug. 14, 2017 it will not recommend an enforcement action for failure to file a notice when relying on certain aggregation exemptions from federal position limit levels (see Press Release).

On February 1, the CFTC’s DSIO issued time-limited No-Action Relief (17-05), stating that from Feb. 4, 2017 to May 8, 2017 it will not recommend an enforcement action against an SD that is subject to and in compliance with margin requirements for non-centrally cleared OTC derivatives in the EU (under EMIR) for failure to comply with the CFTC’s final margin rule (see Press Release).

On January 26, the CFTC published an extension for its Supplementary Proposal on Reg AT (comments now due May 1, 2017) (see Press Release).

On January 25, the CFTC published Proposed Amendments to Swap Data Access Provisions (comments due March 27, 2017).

On January 23, the CFTC published its Proposed Rule on Technical Amendments to Rules on Registration and Review of Exchange Disciplinary, Access Denial or Other Adverse Actions (comments due March 24, 2017). The CFTC also published its Interim Final Rule on Civil Monetary Penalty Adjustments (effective January 23, 2017).

On January 19 the CFTC published a Proposed Rule on Recordkeeping (comments due March 20, 2017) (see Press Release).

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SIFMA Comment Letters

On May 1, SIFMA AMG submitted comments to the CFTC on Regulation Automated Trading (Reg AT).

On March 16, SIFMA submitted comments in response to the CFTC’s Recordkeeping proposal.

On February 7, GFMA/GFXD (in coordination with ABASA/ACLI/FSR/ISDA/IA) submitted comments to relevant national regulatory authorities requesting forbearance from the March 1 variation margin implementation date.

On February 2, SIFMA submitted comments supporting extensions of temporary relief regarding the treatment of SBS as securities as it relates to the ’34 Act and FINRA Rule 0180.

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International Updates

On April 20, ESMA released an article on the impact of financial reforms, and FSB Chair Carney delivered a speech on financial reforms.

On April 19, the ECB released a survey report on credit terms and conditions in securities financing and OTC derivatives for Q1 2017.

On April 18, ESMA announced an MOU with New Zealand regulators regarding CCPs under EMIR.

On April 11, the FSB released a Consultation Document on Proposed Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms. Comments are due by May 11, 2017 (see Press Release).

On April 10, ESMA released clarifications regarding CCP portfolio margining under EMIR.

On April 5, ESMA released an opinion on the EC's Proposal on CCP recovery and resolution (see Press Release).

Also on April 5, ESMA released a Q&A on MiFID II and MiFIR Market Structures Topics (see Press Release).

On April 3, ESMA released an updated EMIR Q&A on CCPs and Trade Repositories (see Press Release) and MiFIR Q&A on data reporting (see Press Release).

On March 31, IOSCO announced its approval of enhanced standards for cross-border enforcement cooperation.

Also on March 31, the FCA published near final rules on MiFID II implementation.

On March 30, ESMA released an updated list of recognized third-country CCPs.

On March 22, the European Parliament held a hearing on CCP recovery and resolution.

On March 17, FSB Chair Mark Carney sent a letter to G20 Finance Ministers and Central Bank Governors outlining the FSB's priorities under the German G20 Presidency (see Press Release).

On March 20, ESMA announced MOUs with regulators in Brazil, Japan, India Dubai and the UAE regarding CCPs under EMIR.

On March 13, the FSB released a consultative document on Proposed Governance Arrangements for UTI (comments due May 5, 2017).

On February 28, CPMI/IOSCO released joint technical guidance on UTI harmonization. ESMA released a final report on draft RTS on package orders under MiFID II and MiFIR. The EBA released a report on CRD IV-CRR/Basel III Monitoring Exercise as of end June 2016. The FSB held a meeting where it assessed regulatory reform efforts (see Press Release). The Systemic Risk Council issued a policy statement to G20 leaders regarding global reform efforts (see Press Release).

On February 23, the following entities released statements on March 1 variation margin implementation: European Supervisory Authorities | Financial Conduct Authority | IOSCO

On February 2, ESMA released an updated EMIR Q&A (see Press Release).

Also on February 2, ESMA released an updated Q&A on MiFIR Data Reporting (see Press Release).

On February 1, the FSB released a consultative document on CCP resolution planning guidance (comments due by March 13, 2017).

Also on February 1, ESMA released its “Methodological Framework on 2017 EU-wide CCP Stress Tests Exercise”.

On January 31, ESMA released updated MiFID II and MiFIR Q&As.

On January 25, the ECB released a report on credit terms in securities financing and OTC derivatives.

On January 23, ESMA Chair Steven Maijoor delivered a speech on derivatives and benchmarks reform.

On January 18, the EBA and ESMA released a Joint Report on CRR and EMIR.

On January 16, ESMA released a briefing note on MiFID II reporting requirements.

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Status of Derivatives-Related Bills

SEC Approves Final Rules on Cross-Border Securities-Based Swap DefinitionsPublic Law No: 115-31: The Consolidated Appropriations Act of 2017. The bill includes a $250 million budget for the CFTC, the same as the 2016 enacted level and $80 million below the President’s budget request. It also includes a $1.6 billion budget for the SEC, which freezes the SEC at the FY 2016 enacted level and is $176 million below the President’s budget request.
Status: The bill became Public Law No: 115-31 on May 5, 2017.

H.R. 10: The Financial CHOICE Act of 2017 would create hope and opportunity for investors, consumers, and entrepreneurs by ending bailouts and Too Big to Fail, holding Washington and Wall Street accountable, eliminating red tape to increase access to capital and credit, and repealing the provisions of the Dodd-Frank Act that make America less prosperous, less stable, and less free, and for other purposes. The bill includes a section on Commissions review and harmonization of rules relating to the regulation of over-the-counter swaps, and treatment of transactions between affiliates.
Status: Passed the House Financial Services Committee by a vote of 34-26 on May 4, 2017.

S. 1005: A bill to amend the Internal Revenue Code of 1986 to modernize the tax treatment of derivatives and their underlying investments, and for other purposes. The bill would, in general: 1) Require mark to market and ordinary tax treatment for all derivatives (under which, taxpayers would generally be required to account for taxable gain or loss from changes in the value of a derivative each year); 2) Radically simplify the tax rules for derivatives; 3) Target taxpayers who use derivatives to avoid taxes; and 4) Spare taxpayers hedging risks and trying to comply with a complex tax code.
Status: Introduced and referred to the Committee on Finance on May 2, 2017.

H.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.

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CONGRESSIONAL CALENDAR

House
In Session: May 16-19, 22-25; June 6-9, 12-16, 20-23, 26-30; July 11-14, 17-20, 24-28.

Senate
In Session: May 15-19, 22-26; June 5-9, 12-16, 19-23, 26-30; July 10-14, 17-21, 24-28.

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