Reed Smith Client Alerts

On October 13, 2017, the U.S. Commodity Futures Trading Commission (CFTC) released a comparability determination that will allow EU swap entities to comply with the EU’s margin requirements for uncleared swaps in lieu of the CFTC’s requirements when transacting with U.S. counterparties.1 Additionally, the CFTC announced that the CFTC and the European Commission have agreed upon a “common approach” for establishing a regulatory framework that will eliminate duplicative regulatory requirements for persons trading on swap execution trading venues subject to both the U.S. and EU regimes.2 CFTC Chairman J. Christopher Giancarlo has long emphasized the need for harmonization with foreign regulators to avoid fragmentation of the global swaps market into separate U.S. and non-U.S. liquidity pools.3 These releases are a significant step forward towards avoiding such an outcome.

Comparability Determination

In January 2016, the CFTC finalized margin regulations that require that all swap dealers and major swap participants (collectively, covered swap entities (CSEs)) to collect and post margin with certain counterparties to uncleared swaps.4 Several CFTC no-action letters followed (together with interpretation from the European Securities and Markets Authority) in recognition of the general market’s unpreparedness for the compliance deadlines.5 Under these regulations, CSEs must collect and post variation margin (VM) with respect to uncleared swaps with other CSEs or with financial end-user counterparties. The term “financial end user” includes a broad swath of financial entities, such as banks, trust companies, funds, investment advisors, and speculative trading operations. CSEs also must collect and post initial margin (IM) with other CSEs and financial end users that have a “material swaps exposure.” A financial end user has a material swaps exposure if it has “an average daily aggregate notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange forwards, and foreign exchange swaps with all counterparties for June, July, and August of the previous calendar year that exceeds $8 billion.”6