On October 26, 2015, CFTC Chairman Timothy Massad, speaking at the 2015 Swap Execution Facility Conference, discussed the wide gap emerging between US and EU regulators regarding swaps rules between the two jurisdictions following the EU's recent update to the Markets in Financial Instruments Directive (MiFID II).

Cross-border harmonization of swaps rules between the jurisdictions has been the subject of ongoing discussions for well over a year now. Some market participants point to a July 2015 Washington, DC speech by Massad as the first signal that cross-border harmonization in this area may not ultimately materialize. The latest is further evidence. Many see the differences between the two regions as almost insurmountable.

Massad noted that regulatory differences between US and EU regulators in the area of derivatives include:

While the new EU rules governing swaps trading will not come into effect until early 2017, the changes proposed in MiFID II will fundamentally alter the trading landscape for derivatives in Europe. These changes come several years after the US implemented its own regulatory reforms under the Dodd-Frank Act.

Massad noted that mutual recognition will be a key focus of the CFTC in 2016. Specifically, Massad said that US and EU regulators can learn from one another by focusing on "overall outcomes" rather than on "item-by-item similarity."

Transparency is one area where there are clear disparities between MiFID II and US rules. Under the new EU rules, or regulatory technical standards (RTS) for MiFID II, there are requirements to ensure that investors are informed as to the true level of actual and potential transactions, irrespective of the venue on which the trades take place. The various venues that would fall under this requirement include regulated markets (RMs), multilateral trading facilities (MTFs), organized trading facilities (OTFs), and systemic internalizers.

These trading venues will be required to provide both pre- and post-trade transparency on transactions, including:

The data reporting requirements are cumbersome, and some market participants believe that they may present obstacles to harmonization.

Doug Friedman, general counsel for TradeWeb markets, noted that US and EU regulators have taken different approaches regarding transparency. Specifically, he noted that the EU's strategy was more data-driven whereas the US approach was more protocol-based.

Executives from several swap execution facilities (SEFs) in the US said they were doubtful that harmonized rules between the US and EU would emerge anytime soon, particularly given outstanding issues in rules governing the SEF market.

Massad reinforced the CFTC's ongoing efforts to resolve outstanding issues in the SEF market, including data reporting.

According to Massad, an upcoming CFTC proposal in this area would create a simple, consistent process for cleared swaps data reporting, and thereby:

Massad added that, in the weeks to come, he will have more to say about the CFTC's data collection efforts, as well as some ideas to ensure that the CFTC obtains timely, accurate, and complete reporting while avoiding excessive burdens and duplication.

For information on clearing and exchange trading under Title VII, including SEFs and the MAT trade process, see Practice Note, The Dodd-Frank Act: Swap Clearing and Exchange Trading under Title VII.

For details on EU clearing rules under EMIR, see Practice Note, EMIR: requirement to clear OTC derivative contracts through a CCP.