The requirement from October 2 for swap dealers and regular users of derivatives to transact swaps on Commodity Futures Trading Commission-mandated swap execution facilities (SEFs) was the last piece in the puzzle for US derivatives market regulation, after mandatory reporting and clearing came in earlier this year.
However, the rules have left other jurisdictions some way behind. European financial market participants are now seeking out non-US persons as counterparties so they remain outside the cross-border provisions of the Dodd-Frank Act, published by the CFTC on July 12, which might require them to trade on SEFs, clear through central clearing houses and report to swap data repositories.
European trading facility operators were particularly hard hit by the US October deadline, after the emergence in May of so-called Footnote 88 of the SEF rules, which required that many-to-many trading platforms were required to register as SEFs, even if the products they carried were not mandated to be traded on the facilities.
The biggest impact of Footnote 88 was felt among FX trading platforms, many of which had assumed they would not be required to register as SEFs until after FX products had been mandated for clearing next year or the year after.
Under pressure from constituents, European commissioner for internal market and services Michel Barnier in late September wrote to the CFTC asking that non-US platforms be given an extension to the October 2 deadline so they could get their SEF applications in order.
In the event, the extension was not forthcoming, meaning that many so-called multilateral trading facilities strictly were no longer permitted to allow market participants covered by the US rules to transact on their platforms.
"What we saw following the October deadline was a move away from multilateral platforms and towards single-dealer platforms and voice trading," says John Wilson, head of OTC clearing at broker Newedge.
Tom Riesack, a managing principal at consultancy Capco, says: "Most of the European counterparties I am dealing with have decided that if they are trading with a US counterparty then they make sure the counterparty is outside the rules by being an affiliate rather than a branch. They have also actively moved positions and portfolios away from US counterparties."
In response, some US financial institutions have made hasty moves to funnel European derivatives business through entities that meet the affiliate designation, sources say.
In any event it is still not always clear whether the US rules apply.
"Sometimes the interpretation is complex," Riesack says. "For example, if there are two non-US persons trading via a broker in the US then the trade is apparently not required to be executed on a SEF, but then some market participants argue that a US broker contaminates the trade and brings it under the remit of the US rules."
As market participants contemplate the impact of the US cross-border provisions, the CFTC has granted a period of relief in a series of no-action letters. These relate to issues such as reporting requirements, transaction confirmations and, in one case, the failure of an Australian multilateral trading platform to register as a SEF in time. The platform, Yieldbroker Ltd, which gives US persons direct access to swaps, was given until November 1 to comply.
Although it might be tempting for non-US market players to accuse the CFTC of rushing through its rules, an equally compelling argument might be that other jurisdictions have fallen an unreasonable amount of time behind.
Europe, for example, has consistently delayed implementation of derivative rules, and does not expect to introduce trade reporting until early next year, with clearing and mandated electronic trading to follow some time after.
"In Europe, the obligation to trade on a mandated venue, the obligation to clear and the obligation to report are not yet effective. However, we do know what the framework setting out these requirements looks like," says Vladimir Maly, a partner in the London office of Latham & Watkins.
One area where Europe has made progress is on its version of US cross-border rules, which it calls equivalence. Equivalence means European firms operating in other jurisdictions, for example the US, can comply with local derivative rules rather than European ones. In addition, once a country is granted equivalence, clearing houses and trade repositories in other jurisdictions should be able to provide their services in Europe.
The problem for market participants is that some rules have been designated by the European Securities and Markets Authority as conditionally equivalent, while other European rules are not so much equivalent to their US counterparts as substantially different.
"We were pretty surprised when Esma came up with conditional equivalence, which means there is already some level of disagreement," says Stewart Macbeth, CEO, DTCC Derivatives Repository Limited. "But in respect of reporting, the rules are different in Europe, for example on some of the data fields and in terms of who is responsible to report. For us, that means our US and European units need to be operationally separate, which obviously incurs additional costs."
US and European regulators agreed what they called a Path Forward in July, aimed at increasing collaboration on regulatory change. As policymakers struggle to make that happen, some market participants have decided their own path heads in another direction.