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Regulation Of OTC Derivatives Markets: A Comparison Of EU And US Initiatives (Clifford Chance, ISDA)

Date 12/09/2012

Both the EU and the US have now adopted the primary legislation which aims to fulfil the G20 commitments that all standardised over-the-counter (OTC) derivatives should be cleared through central counterparties (CCPs) by end 2012 and that OTC derivatives contracts should be reported to trade repositories (and the related commitments to a common approach to margin rules for uncleared derivatives transactions). The US Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in July 2010 and the text of the EU Regulation on OTC Derivatives, CCPs and Trade Repositories (EMIR) was finally published in the Official Journal on 27 July 2012.

There is a significant commonality of approaches between EMIR and the Dodd-Frank Act in relation to the regulation of OTC derivatives markets, but there are also some significant differences. This paper summarises the way in which the two regimes treat different categories of counterparty and highlights certain other major differences between EMIR and the Dodd-Frank Act in relation to OTC derivatives regulation.

However, both EMIR and the Dodd-Frank Act require the adoption of extensive implementing rules and technical standards before they can become fully effective and these will significantly affect how the two regimes operate in practice. While the US regulators have now adopted many of the rules required to implement the Dodd-Frank Act, a number of key points are not yet settled and the EU consultation process on implementing measures under EMIR is still in progress. Both the EU and the US regulators have paused progress on their proposals for margin rules for uncleared derivatives pending the outcome of the BCBS-IOSCO consultation on common international standards.

In addition, the Dodd-Frank Act addresses issues relating to the execution of OTC derivative contracts on electronic trading platforms, post-trade transparency and position limits for commodity derivatives. The EU is addressing these issues (and others relating to trading and transparency of OTC derivatives markets) in the proposals to replace the existing Markets in Financial Instruments Directive (MiFID) with a new restated Directive (MiFID 2) and a new companion EU Regulation (MiFIR). This legislation is only likely to be adopted in 2013 and will itself also require extensive implementing measures before it comes into effect. Comments in this paper on MiFID 2 or MiFIR are based on the latest proposed compromise text of the legislative proposals prepared by the Presidency of the EU Council of Ministers.

Regulation of OTC derivatives markets - A comparison of EU and US initiatives - September 2012