E.U. recognizes U.S. derivatives trading venues for purposes of MiFID II/MIFIR

By Lene Powell, J.D.

Heading off possible fragmentation of E.U. and U.S. derivatives markets, the European Commission announced that it will recognize CFTC-authorized Designated Contract Markets (DCMs) and Swap Execution Facilities (SEFs) as eligible for compliance with EU derivatives trading requirements under MiFID II/MIFIR. The decision ensures that E.U. counterparties can trade derivatives instruments subject to the requirements, including interest rate swaps and index-based CDS, on U.S. trading venues after the new framework goes into effect as of January 3, 2018.

In a joint statement, Valdis Dombrovskis, European Commission Vice-President in charge of Financial Stability, Financial Services, and Capital Markets Union said, “Today's decision on equivalence, together with the CFTC staff's recommendation for an exemption order, confirms how global cooperation can bring tangible benefits to market operators on both sides of the Atlantic.”

CFTC Chairman J. Christopher Giancarlo encouraged his fellow commissioners to approve a pending staff recommendation for exemption from the CFTC’s SEF registration requirement for multilateral trading facilities (MTFs) and organized trading facilities (OTFs) authorized in the E.U.

MiFID II/MiFIR and equivalence. Under the new MiFID II and MiFIR framework, as of January 3, 2018, EU financial and non-financial counterparties must execute derivatives transactions subject to the trading obligation on E.U. trading venues or third-country trading venues recognized by the European Commission as “equivalent.” Derivatives that have been designated by E.U. regulators as subject to the E.U. trading obligation include euro, dollar, and pound interest rate swaps in the most common benchmark tenors, as well as index-based CDS.

On October 13, 2017, the CFTC and European Commission agreed to a “Common Approach” framework allowing for mutual recognition of derivatives trading facilities in the U.S. and E.U. Under the Common Approach, the two jurisdictions agreed that:

1. The European Commission intended to adopt an equivalence decision covering CFTC authorized SEFs and DCMs that are notified to it by the CFTC, provided the requirements of the Markets in Financial Instruments Regulation (MiFIR), the Markets in Financial Instruments Directive (MiFID II), and the Market Abuse Regulation (MAR) are met. 
2. The CFTC intended to propose, and the chairman would support, the CFTC's exemption from the SEF registration requirement, through a single exemption order, of the trading venues authorized in accordance with the MiFID II/MiFIR requirements that have been identified to the CFTC by the EC, provided they satisfy the standard in Commodity Exchange Act Section 5h(g).

The European Commission’s equivalence decision and annex on December 5, 2017 provide further details and list the specific DCMs and SEFs that have been deemed equivalent.

Pending CFTC exemption. According to the joint statement, the exemption recommendation for EU-authorized MTFs and OTFs, currently pending before the CFTC, is the first time the CFTC has adjudicated an exemption from the SEF registration requirement.

“I thank Vice President Dombrovskis and his staff for all of their work in reaching this positive result. I also welcome and support the CFTC staff recommendation to the Commission for an exemption order applicable to EU trading venues and encourage my fellow Commissioners to act expeditiously in approving the order,” said Giancarlo.