CFTC and ESMA Enter into MOU on Clearinghouse Equivalence | Practical Law

CFTC and ESMA Enter into MOU on Clearinghouse Equivalence | Practical Law

The CFTC announced that it and the European Securities Market Authority (ESMA) entered into a memorandum of understanding (MOU) on information sharing regarding ESMA's assessment of compliance with ongoing conditions for its recognition in the EU of CFTC-registered derivatives clearing organizations (DCOs).

CFTC and ESMA Enter into MOU on Clearinghouse Equivalence

Practical Law Legal Update w-002-5591 (Approx. 4 pages)

CFTC and ESMA Enter into MOU on Clearinghouse Equivalence

by Practical Law Finance
Published on 08 Jun 2016 • USA (National/Federal)
The CFTC announced that it and the European Securities Market Authority (ESMA) entered into a memorandum of understanding (MOU) on information sharing regarding ESMA's assessment of compliance with ongoing conditions for its recognition in the EU of CFTC-registered derivatives clearing organizations (DCOs).
On June 6, 2016, the CFTC announced that it and the European Securities Market Authority (ESMA) entered into a memorandum of understanding (MOU) on information sharing regarding ESMA's assessment of compliance with ongoing conditions for its recognition in the EU of CFTC-registered derivatives clearing organizations (DCOs).
The MOU outlines the information-sharing agreement between the CFTC and ESMA that allows ESMA to monitor continued compliance with its requirements for recognition of central clearing counterparties (CCPs) that are registered with the CFTC as DCOs.
The MOU follows the adoption by the European Commission of a March equivalence determination between the CFTC and ESMA that the US and EU regulatory regimes for CCPs was equivalent under the recognition conditions (see Legal Updates, CFTC Approves Substituted Compliance for US-EU Derivatives Clearinghouses and Provides No-Action Relief and European Commission Adopts Equivalence Decision for US CCP Regulatory Regime).
The March CFTC-ESMA equivalence determination allowed DCOs to seek individual recognition by European authorities to clear swaps for European clients. The present MOU outlines the information sharing provisions that will enable ESMA to determine individual DCO eligibility for EU recognition (DCOs that have applied for recognition are referred to as "covered CCPs").
The full requirements (recognition conditions) for covered CCP recognition are contained in:
  • Article 25 of EMIR.
  • Paragraphs 2 and 3 of Article 1 of the European Commission Implementing Decision (note that certain agricultural commodity contracts are excluded from this determination under Article 2 of the implementing decision).
The general provisions of the MOU provide that, among other things:
  • ESMA has no direct supervisory or enforcement power over covered CCPs, and instead relies entirely on the supervisory enforcement capabilities of the CFTC to oversee its registered DCOs and ensure compliance with CFTC law.
  • This MOU does not cover cooperation with respect to CCPs established in the EU (the MOU is a one-way information sharing agreement) because ESMA does not have direct supervisory power over CCPs registered in the EU.
  • The respective authorities should provide each other with the fullest cooperation permissible under their laws and regulations in relation to ESMA's assessment of compliance by covered CCPs with the recognition conditions, unless:
    • cooperation would require an authority to violate its laws or regulations; or
    • cooperation would conflict with the public interest of the respective authorities.
Specifically, the MOU requires cooperation in and addresses, among other things:
  • Communications on covered CCPs, including general issues regarding each covered CCP, issues relevant to the operations, activities, and services of each covered CCP, as well as any other areas of mutual interest. Communication is not limited to, but will be most useful in, the following circumstances:
    • the initial application for recognition of a DCO in the EU;
    • changes in the covered CCP's internal rules, especially those that may affect the way in which the covered CCP complies with the recognition conditions; and
    • regulatory or supervisory actions.
  • Communications about potential or actual financial crisis or other emergency situations that could threaten the covered CCP, especially if the covered CCP is systemically significant.
  • Notification of the relevant authority when, among things:
    • material events occur that could impact the covered CCP's financial stability or its compliance with laws or regulations to which it is subject;
    • enforcement actions occur;
    • a covered CCP is approved to provide services to EU clients or a covered CCP is required to comply with additional EU regulations to fulfill the recognition conditions (these involve ESMA requirements to communicate with the CFTC);
    • the laws to which covered CCPs are subject materially change.
  • Written communications, including but not limited to information that allows ESMA to determine compliance with applicable laws and regulations and information on changes to the relevant obligations.
  • The process under which communications should be requested.
  • On-site inspections. Specifically, the MOU states that ESMA does not anticipate on-site inspections, that it will rely, to the extent possible, on CFTC inspections, and that any required on-site inspections by ESMA will be undertaken only after a discussion with the CFTC.
  • Permissible uses of information.
  • Confidentiality of the information.
The MOU is not legally binding and may not supersede any domestic laws.
  • Some US CCPs have already begun to apply for recognition by ESMA, and in order to prevent interruption to their clearing services for EU customers, US CCPs must gain recognition by the implementation date of the EU clearing requirement, which occurs on June 15, 2016.