US and EU regulators ponder FX exemption alignment
The clock has begun ticking on granting the US an exemption from clearing and trading rules for FX swaps and forwards, after the release of the CFTC's product definitions on over-the-counter (OTC) derivatives last week. EU regulators have said they need to look at what this means for an EU exemption.
In terms of granting a global exemption from the clearing requirements for FX swaps and forwards, there is still a question mark about aligning the two regimes – the US and EU – because in the US there’s the notion that if the exemption is granted then the definition of a "swap" is taken out.
However, in Europe, there is no construct to take out of the definition of the swap, so participants would be subject to bilateral clearing margin requirements.
The European Securities and Markets Authority (ESMA) will look closer at the argument for an exemption of FX forwards from clearing requirements under the European Market Infrastructure Regulation (EMIR) and will discuss the issue further with US regulators, according to Derivatives Intelligence, a sister publication of EuromoneyFXNews.
Despite pressure from industry officials and those within the European Commission (EC), ESMA has held off from placing an exemption for FX forwards in its latest consultation for technical standards for OTC derivatives, central counterparties and trade repositories.
The US Treasury has proposed to exempt FX swaps and forwards from mandatory clearing and organized trading under the Dodd-Frank Act, while Patrick Pearson, head of financial markets infrastructure at the EC, has publicly called on ESMA to mirror the standards being proposed in the US.
Edouard Vieillefond, chair of the OTC derivatives task force and head of international affairs at the Autorité des marchés Financiers, told industry officials at an ESMA hearing last week there is no product exemptions for those derivatives that are classed as financial instruments under the Markets in Financial Instruments Directive (MiFID).
“So, in the short term, it means that all derivatives that are also financial instruments, as indicated in the annex to MiFID, will need to comply with EMIR,” says Vieillefond. “If one day the definition on financial instruments in MiFID changes, of course the implementation to derivatives will change.”
Vieillefond argues, however, that the differences between rules being proposed in the US and the EU over an exemption for FX might not be as wide as predicted by some in the industry.
“We need to check for FX derivatives – what it means to be both a derivative and a financial instrument, because derivatives that are not financial instruments are not in the scope," he says. "We may see that the difference with the US will not be as big as some think, because, for instance, for spot products for commercial contracts, etc, they are not in the scope because of the MiFID definitions.
“We will work on this. There may be some remaining differences with the US and they will be addressed as such where any discussions remain between the US and the EU.”