Sidley Derivatives | Q1 2017 • 1 IN THIS ISSUE Q1 2017 Sidley Derivatives QUARTERLY Visit sidley.com for more information on Sidley’s securities & derivatives enforcement and regulatory practice. U.S. DERIVATIVES DEVELOPMENTS: CFTC AND NFA CFTC Approves NFA Amendment to Forex Dealer Rules Requiring Certain Disclosures of Forex Transaction Data to Forex Customers On January 5, 2017, the CFTC approved the NFA’s amendment to NFA Compliance Rule 2-36, which requires forex dealer members to provide customers with certain transaction-execution data upon request. The effective date of the amendment was March 31, 2017. The rule change creates a framework for retail forex customers to obtain execution information to permit them to review the quality of the execution received compared to that of other customers of the forex dealer. Specifically, upon request of the customer, a forex dealer must deliver specified transaction data for the 15 transactions in the same currency pair that occurred within 15 minutes before and after the customer’s transaction. The rule change reflects the NFA’s and the CFTC’s view that retail forex customers should be given greater transparency with respect to transaction data relating to their forex dealer. A copy of the November 25, 2016 NFA letter to the CFTC which motivated the amendment is available at: http://www.nfa.futures.org/news/PDF/ CFTC/CR-2-36-Reqs-Forex-Transactions-111716.pdf. CFTC Grants No-Action Relief for Certain Delegating CPOs On January 10, 2017, the DSIO issued No-Action Letter 17-01, which appears to be the first written guidance from the CFTC on CPO delegation issues since its No-Action Letter 14-126 of October 15, 2014. Prior CFTC Staff Letter 14-69 (May 12, 2014) provided guidelines and a standardized form for requesting registration relief for a delegating CPO, and No-Action Letter 14-126 further clarified the conditions for relief and made the relief self-executing. No-Action Letter 17-01 provides relief from CPO registration to a requesting entity that was unable to satisfy condition six of No-Action Letter 14-126, which requires that “one such CPO controls, is controlled by, or is under common control with the other CPO.” The requesting entity in Letter 17-01 is delegating to a CPO that is both registered as a CPO and registered as an investment adviser. Whether this No-Action Letter marks the beginning of a wave of responses to the multiple requests for relief submitted since 2014 or is just an isolated response remains to be seen. A copy of CFTC No-Action Letter 17-01 is available at: http://www.cftc.gov/ idc/groups/public/@lrlettergeneral/documents/letter/17-01.pdf. U.S. DERIVATIVES DEVELOPMENTS CFTC and NFA .............................. 1 SEC and FINRA ............................. 7 U.S. ENFORCEMENT DEVELOPMENTS ............................... 8 EUROPEAN DERIVATIVES DEVELOPMENTS ............................... 9 ASIA DERIVATIVES DEVELOPMENTS ............................. 10 GLOSSARY OF FREQUENTLY USED TERMS ............ 15
Transcript
Sidley Derivatives | Q1 2017 • 1
IN THIS ISSUE
Q1 2017
SidleyDerivativesQUARTERLY
Visit sidley.com for more information on Sidley’s securities & derivatives enforcement and regulatory practice.
U.S. DERIVATIVES DEVELOPMENTS: CFTC AND NFA
CFTC Approves NFA Amendment to Forex Dealer Rules Requiring Certain Disclosures of Forex Transaction Data to Forex Customers
On January 5, 2017, the CFTC approved the NFA’s amendment to NFA Compliance Rule 2-36, which requires forex dealer members to provide customers with certain transaction-execution data upon request. The effective date of the amendment was March 31, 2017. The rule change creates a framework for retail forex customers to obtain execution information to permit them to review the quality of the execution received compared to that of other customers of the forex dealer. Specifically, upon request of the customer, a forex dealer must deliver specified transaction data for the 15 transactions in the same currency pair that occurred within 15 minutes before and after the customer’s transaction. The rule change reflects the NFA’s and the CFTC’s view that retail forex customers should be given greater transparency with respect to transaction data relating to their forex dealer.
A copy of the November 25, 2016 NFA letter to the CFTC which motivated the amendment is available at: http://www.nfa.futures.org/news/PDF/CFTC/CR-2-36-Reqs-Forex-Transactions-111716.pdf.
CFTC Grants No-Action Relief for Certain Delegating CPOs
On January 10, 2017, the DSIO issued No-Action Letter 17-01, which appears to be the first written guidance from the CFTC on CPO delegation issues since its No-Action Letter 14-126 of October 15, 2014. Prior CFTC Staff Letter 14-69 (May 12, 2014) provided guidelines and a standardized form for requesting registration relief for a delegating CPO, and No-Action Letter 14-126 further clarified the conditions for relief and made the relief self-executing.
No-Action Letter 17-01 provides relief from CPO registration to a requesting entity that was unable to satisfy condition six of No-Action Letter 14-126, which requires that “one such CPO controls, is controlled by, or is under common control with the other CPO.” The requesting entity in Letter 17-01 is delegating to a CPO that is both registered as a CPO and registered as an investment adviser. Whether this No-Action Letter marks the beginning of a wave of responses to the multiple requests for relief submitted since 2014 or is just an isolated response remains to be seen.
A copy of CFTC No-Action Letter 17-01 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-01.pdf.
U.S. DERIVATIVES DEVELOPMENTS
CFTC and NFA .............................. 1 SEC and FINRA ............................. 7
U.S. ENFORCEMENT DEVELOPMENTS ...............................8
EUROPEAN DERIVATIVES DEVELOPMENTS ...............................9
ASIA DERIVATIVES DEVELOPMENTS ............................. 10
CFTC Proposes Long-Awaited Amendments to Recordkeeping Rules
On January 12, 2017, the CFTC approved proposed amendments (Rule 1.31 Proposal) to the recordkeeping obligations set forth in CFTC Regulation 1.31 (Recordkeeping Rule). The Rule 1.31 Proposal is a long-awaited response to multiple industry groups’ long-standing petitions urging the CFTC to modernize its Recordkeeping Rule by eliminating references to outdated technology and industry practices that make the rule unduly burdensome and costly for the industry. The Rule 1.31 Proposal principally seeks to address such outdated and irrelevant obligations by eliminating technology-specific requirements and instead focusing on the integrity and availability of regulatory records generally. Significant aspects of the Rule 1.31 Proposal include making the form and manner in which records must be kept technology-neutral and removing a requirement for recordkeepers to hire third-party technical consultants.
For more information, see Sidley’s Client Update on this subject at: http://www.sidley.com/~/media/update-pdfs/2017/02/20170207-cftc-proposes-amendments-to-regulation-131.pdf.
A copy of the CFTC proposing release is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2017-01148a.pdf.
House Approves End-User Relief Act Reauthorizing CFTC
On January 12, 2017, the U.S. House of Representatives passed the Commodity End-User Relief Act (H.R. 238) (the House Bill), which would re-authorize the CFTC for another five years of operation and cut back on some Dodd-Frank provisions. Given the focus on Dodd-Frank by the current administration, further changes may be proposed.
Among other things, the House Bill: (i) expands the definition of bona fide hedging to cover anticipatory hedging and risk management, allowing a broader exception from position limits; (ii) removes language supporting position limits on commodities futures and option contracts and economically equivalent swaps; (iii) permanently establishes the US$8 billion threshold to registration as a swap dealer; (iv) excludes transactions between affiliates from regulation as “swaps”; (v) prohibits the CFTC from requiring firms to produce source code or other intellectual property without a subpoena; and (vi) relaxes certain reporting requirements and FCM residual interest requirements.
A copy of the House Bill is available at: https://www.congress.gov/bill/115th-congress/house-bill/238/text.
CFTC Proposes to Amend Swap Data Access Provisions
On January 13, 2017, the CFTC issued a proposed amendment (the Proposed Data Access Amendment) to the existing rules governing foreign and domestic authorities’ access to swap data maintained by SDRs. The Proposed Data Access Amendment would remove the existing requirement that foreign and domestic authorities seeking access to SDR data first indemnify the CFTC and each SDR from which such authorities access swap data. Instead, the Proposed Data Access Amendment would permit certain domestic regulators to access SDR swap data by entering into confidentiality arrangements with the CFTC. Foreign and other domestic authorities would also be able to access such data by entering a confidentiality agreement, subject to the CFTC determination that they are appropriate recipients of the data. Entities seeking an appropriateness determination would have to file an application with the CFTC from which the CFTC would determine whether the applicant: (i) is acting within the scope of its jurisdiction in seeking such data; and (ii) employs appropriate safeguards to ensure that any data received will not be disclosed beyond the scope specified in the confidentiality
arrangement. Although the existing rules require SDRs to notify the CFTC of all data access requests, the Proposed Data Access Amendment would only require SDRs to notify the CFTC only of initial requests or requests beyond the scope of the requestor’s jurisdiction. The CFTC would also be empowered to direct SDRs to suspend, limit or revoke: (i) a prior appropriateness determination; or (ii) data access, in certain circumstances. The Proposed Data Access Amendment was open for public comment through March 27, 2017.
A copy of the Proposed Data Access Amendment is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2017-01287a.pdf.
CFTC Authorizes Use of Portfolio Margining at LCH.Clearnet
On January 13, 2017, the CFTC issued an order (the LCH Order) for LCH.Clearnet Limited (LCH), a CFTC-registered DCO, permitting LCH and its registered FCM clearing members to hold customer funds used to secure futures, foreign futures and cleared swaps, respectively, in a single segregated cleared swaps account and to apply portfolio margin treatment to such futures, foreign futures and cleared swaps positions. Under the CFTC’s customer protection regime, FCMs and DCOs are normally required to maintain separate segregated futures customer, foreign futures customer and cleared swaps collateral accounts, each holding the customer funds used to margin, secure or guarantee the customer futures, foreign futures or cleared swaps positions, respectively, and to calculate separate margin requirements for each such account. The LCH Order will permit LCH to offer portfolio margin capabilities to its clearing members, where instead of satisfying three different margin requirements with respect to such customer positions, eligible clearing members would be able to satisfy a single risk-based margin requirement to secure all positions in a single customer account. Portfolio margin treatment typically results in a lower overall margin requirement for clearing members.
A copy of the LCH Order is available at: http://www.cftc.gov/idc/groups/public/@requestsandactions/documents/ifdocs/lchltd4dorder1-13-17.pdf.
CFTC Staff Provides No-Action Relief from Residual Interest Withdrawal Restrictions
On January 26, 2017, the CFTC staff issued CFTC No-Action Letter 17-03, which provides conditional relief for FCMs that carry cleared swaps customer accounts from the timing requirements in CFTC Rule 22.17(b) with respect to withdrawals of excess residual interest from customer accounts. CFTC Rule 22.2(f)(6)(iii)(A) requires an FCM, prior to the time of clearing settlement with a DCO, to maintain residual interest in cleared swaps customer accounts that is equal to, or exceeds, the aggregate amount by which each cleared swaps customer is under-margined. As a cleared swaps customer posts margin, the under-margined amount with respect to that customer decreases, and the FCM’s excess residual interest increases. However, CFTC Rule 22.17(b) prohibits an FCM from withdrawing its residual interest in cleared swaps customer accounts prior to preparing the relevant daily cleared swaps segregation calculation as of the close of business the prior business day. This timing lag could result in significant amounts of an FCM’s capital in excess of the required residual interest amount being locked in cleared swaps customer accounts throughout the day. CFTC Letter 17-03 permits an FCM to withdraw excess residual interest to the extent that margin payments have been deposited by cleared swaps customers to reduce the under-margined amount in the cleared swaps customer accounts, subject to certain conditions. Among those conditions: (i) an FCM must have robust risk management processes and controls in place to ensure that such withdrawals will not result in any risk of intraday under-segregation in the cleared swaps customer accounts; (ii) an FCM must document its consideration of the impact on cleared swaps segregation of any other disbursements not made for the benefit of cleared swaps customers; and (iii) the withdrawal may not result in an FCM holding less than 110 percent of its current targeted residual interest balance in cleared swaps customer accounts.
A copy of CFTC No-Action Letter 17-03 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-03.pdf.
CFTC Provides Time-Limited No-Action Relief for Aggregation Exemption Notices Relating to Position Limits
On February 6, 2017, the CFTC issued a No-Action Letter (Notice Filing Letter) stating that it will not recommend an enforcement action for failure to file a notice when relying on certain aggregation exemptions from federal position limit levels. The relief extends the compliance date for disaggregation notice filings under CFTC Rule 150.4(c) from February 14, 2017 to August 14, 2017. The Notice Filing Letter only addresses the disaggregation notice filing requirement of CFTC Rule 150.4(c) and does not excuse or delay compliance with the other requirements of CFTC Rule 150.4. The CFTC’s DMO also announced that it has established a portal (Position Aggregation Exemption Portal) for the filing of aggregation exemption notices.
A copy of the Notice Filing Letter is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-06.pdf.
The Position Aggregation Exemption Portal is located at: https://forms.cftc.gov/_layouts/PublicForms/NoticeFiling.aspx.
CFTC Provides Relief to Swap Dealers for Minimum Transfer Amount for Margin on Uncleared Swaps with Separately Managed Accounts
On February 13, 2017, the CFTC’s DSIO issued No-Action Letter 17-12 (the SMA Letter) advising that the DSIO will not recommend enforcement action against a swap dealer that does not comply with the minimum transfer amount (MTA) requirements of CFTC Regulations 12.152(b) or 23.153(c) for its uncleared swaps with an entity (Owner) that owns more than one separately managed account (SMA) where the swap dealer treats each such SMA as a separate counterparty for purposes of applying the MTA (notwithstanding that the SMAs are all owned by the Owner). Absent this relief, swap dealers would be required to determine MTA based on the Owner’s aggregate position, notwithstanding that such Owner’s SMAs are treated as separate counterparties under the applicable swap documentation.
The relief is subject to the following conditions: (i) the applicable swaps are entered into between the swap dealer and an asset manager on behalf of an SMA owned by the Owner under an investment management agreement as described in the SMA Letter; (ii) the SMA’s swaps are subject to a master netting agreement that does not permit netting of initial or variation margin across the Owner’s SMAs; and (iii) the swap dealer applies an MTA of not greater than US$50,000 to the initial and variation margin collection and posting obligations required pursuant to the CFTC regulations for such SMA.
A copy of the SMA Letter is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-12.pdf.
CFTC Issues Time-Limited No-Action Relief for Failure to Meet March 1 Deadline to Exchange Variation Margin for Uncleared Swaps
On February 13, 2017, the CFTC issued No-Action Letter 17-11, providing time-limited no-action relief until September 1, 2017 for swap dealers subject to the CFTC’s new uncleared swaps margin rules (the CFTC Margin Rules) with respect to the March 1, 2017 deadline for required exchange of variation margin with certain market participants. Swap dealers subject to the CFTC Margin Rules are required to use their best efforts to continue to implement
compliance with the March 1, 2017 variation margin requirements, and to continue to exchange variation margin under current credit support arrangements in order to avail themselves of this no-action relief.
A copy of CFTC No-Action Letter 17-11 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-11.pdf.
Federal Reserve Board and OCC Issue Guidance on March 1 Uncleared Swaps Variation Margin Deadline
On February 23, 2017, the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC) issued guidance explaining how supervisors should examine compliance with the U.S. Prudential Regulators’ new uncleared swaps margin rules (the PR Margin Rules) by U.S. prudentially regulated swap dealers. The guidance explains that U.S. prudentially regulated swap dealers are expected to be in compliance with the PR Margin Rules with respect to counterparties that present significant credit and market risk exposures by March 1, 2017. For other counterparties that do not present significant credit and market risks, however, the FRB and OCC expect swap dealers to make good faith efforts to comply with the PR Margin Rules in a timely manner, but no later than September 1, 2017. This relief complements the relief provided by CFTC No-Action Letter 17-11 described above.
A copy of the guidance is available at: https://www.federalreserve.gov/supervisionreg/srletters/sr1703.htm.
CFTC Issues Time-Limited No-Action Relief for Variation Margin Exchange with Certain Japanese Counterparties
On February 23, 2017, the CFTC issued No-Action Letter 17-13, providing time-limited no-action relief for swap dealers subject to both the CFTC Margin Rules and the margin requirements of the Financial Services Agency of Japan (the Japan Margin Rules) with respect to the timing of collection and posting of variation margin. These entities include certain Japanese banks. The Japan Margin Rules generally require variation margin to be calculated and exchanged with “sufficient frequency,” as determined by the counterparties. The CFTC Margin Rules, however, generally require variation margin to be calculated and exchanged on a daily basis. The CFTC’s no-action relief permits swap dealers subject to both the CFTC Margin Rules and the Japan Margin Rules to comply with the Japan Margin Rules, provided that variation margin is calculated and exchanged every three days following the execution of the covered swap. The no-action relief is available until March 1, 2020.
A copy of CFTC No-Action Letter 17-13 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-13.pdf.
CFTC’s DMO Issues Extension of No-Action Relief Regarding Masking of Certain Identifying Information Required to Be Reported
On March 10, 2017, the CFTC’s DMO issued No-Action Letter 17-16, providing a conditional extension of the relief provided in CFTC No-Action Letters 16-03 and 16-33, regarding masking of certain identifying information required to be reported by Part 45 and Part 46 reporting counterparties, Part 20 reporting entities and parties required to file Forms 102A and 102B. The DMO is removing the conditions that parties relying on the relief seek, receive and provide to the DMO confirmation from relevant foreign authorities that the relief is necessary. In addition
to providing the extension, the DMO states in the letter that the Privacy Law Identifier (PLI) condition of relief requires that the PLI must be unique to each counterparty covered by the relief and must identify such counterparty to the exclusion of all other counterparties.
The extension is valid through September 1, 2017 for certain French and Swiss swaps described in the extension as “French Reportable Swaps” and “Swiss Reportable Swaps.” For all other swaps, the extension is valid with respect to each reporting counterparty for as long as the reporting counterparty reasonably believes that reporting the relevant identifying information would violate applicable foreign laws.
A copy of CFTC No-Action Letter 17-16 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-16.pdf.
CFTC Extends Comment Period on Rules Establishing Swap Dealer Capital Requirements
On March 13, 2017, the CFTC announced that it is extending the comment period on its proposed capital requirements applicable to swap dealers and MSPs for an additional 60 days to May 15, 2017. The proposed rules establish minimum capital requirements for swap dealers and MSPs that are not subject to the capital rules of a prudential regulator (essentially non-banks). Minimum capital requirements for swap dealers and MSPs are r equired to be implemented by Dodd-Frank pursuant to sections 4s(e) and (f) of the CEA. The proposed rules set forth a variety of approaches that may be used to calculate minimum capital requirements, subject to certain conditions. The proposed rules also include recordkeeping, reporting and notification requirements for swap dealers and MSPs relative to their respective capital requirements.
A copy of the proposed rules is available at: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2016-29368a.pdf.
CFTC Further Extends No-Action Relief to Swap Execution Facilities from Certain Uncleared Swap Trade Document Requirements
On March 24, 2017, the CFTC’s DMO issued No-Action Letter 17-17 (the 2017 SEF Letter) extending the relief provided to SEFs from certain record gathering, recordkeeping and reporting requirements originally provided in 2014 and extended in 2015 and 2016, in each case subject to conditions. Specifically, SEFs are relieved from: (i) the requirement under CFTC Regulation 37.6 that SEFs must obtain documents that are incorporated by reference in uncleared swap trade confirmations issued by a SEF (Referenced Documents) in advance of trade execution; (ii) the recordkeeping provisions under CFTC Regulations 37.1000, 37.1001 and 45.2(a), which require SEFs to maintain Referenced Documents in their records; and (iii) the requirement under CFTC Regulation 45.3 that a SEF must report confirmation data contained in Referenced Documents. In addition, the DMO indicates that it would not recommend enforcement action if, in an uncleared swap confirmation provided under CFTC Regulation 37.6(b), a SEF incorporates by reference terms from previously-negotiated agreements between the counterparties without first having obtained copies of such agreements. The conditions required for this relief under the 2017 SEF Letter are unchanged from those under No-Action Letter 16-25 (the 2016 SEF Letter), which expired on March 31, 2017. The 2017 SEF Letter extends the relief provided to the earlier of March 31, 2018 and the effective date of revised CFTC regulations that establish Referenced Document capture, maintenance and reporting requirements for SEFs in relation to uncleared swaps.
A copy of the 2017 SEF Letter is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-17.pdf.
CFTC Staff Issues No-Action Relief Regarding the Application of CFTC Regulation 75.14(a) (Volcker Rule “Super 23A” Restrictions) to the Provision of Clearing Services by an FCM to a Covered Fund
On March 29, 2017, the CFTC’s DSIO issued No-Action Letter 17-18 that provides relief with respect to a provision of the implementing regulations under 12 U.S.C. 1851 (the Volcker Rule). That provision (and its equivalent under implementing rules of other federal agencies) is sometimes referred to as “Super 23A.” The provision, Regulation 75.14(a), restricts “banking entities” from taking certain kinds of credit exposure to “covered funds,” and it operates by reference to Section 23A of the Federal Reserve Act (which has long limited the credit exposure that insured depository institutions may take to their affiliates). The DSIO stated that subject to a number of conditions, it will not recommend an enforcement action if a registered FCM that is affiliated with other banking entities provides futures, options and swap clearing services to covered funds to which the FCM’s affiliates provide investment management or investment advisory services (or in connection with which such affiliates engage in certain other fund-related activities). This relief was granted notwithstanding that FCMs effectively guaranteed the performance of their clearing customers.
A copy of CFTC No-Action Letter 17-18 is available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-18.pdf.
James McDonald Appointed as Director of the CFTC’s Division of Enforcement
On March 30, 2017, acting CFTC Chairman Giancarlo announced the appointment of James McDonald as Director of the CFTC’s Enforcement Division. Mr. McDonald previously worked as an assistant U.S. attorney for the Southern District of New York. Mr. McDonald replaced former Director Aitan Goelman.
A copy of the Press Release is available at: http://www.cftc.gov/PressRoom/PressReleases/pr7541-17.
SEC Again Extends Temporary Exemption from Compliance with Certain Provisions of the Securities Exchange Act of 1934 Related to Security-Based Swaps
On January 18, 2017, to provide the SEC with additional time to consider and manage the regulatory impact of revising the definition of “security” in the Securities Exchange Act of 1934 (Exchange Act) to include security-based swaps as required by Dodd-Frank, the SEC issued an order extending a temporary exemption from compliance with certain provisions of the Exchange Act for any person engaging in security-based swap activities who is either: (i) an eligible contract participant (ECP) or (ii) a registered broker or dealer. The extension serves as a catch-all and applies only to provisions that have not been assigned a compliance date by an existing securities-based swap rulemaking. In the absence of this temporary relief, affected persons engaging in security-based swap activity would have been required to comply with those provisions by February 5, 2017. With this temporary extension, the latest in a series of extensions since the original exemptive order was issued on July 1, 2011, such persons remain exempt from the requirements until February 5, 2018. The SEC has also included a request for comments on whether the exemptive relief should be extended beyond the new 2018 deadline.
A copy of the SEC order is available at: https://www.gpo.gov/fdsys/pkg/FR-2017-01-25/pdf/2017-01620.pdf.
On March 10, 2017, the SEC issued an order (the Bitcoin Order) disapproving the listing by the Bats BZX Exchange of shares of the Winklevoss Bitcoin Trust (Trust), a proposed commodity-trust exchange traded fund (ETF) that would hold bitcoins as an asset. The Trust’s investment objective was for its shares to track the price of bitcoins on the Gemini Exchange, a digital-asset exchange that is affiliated with the Trust’s sponsor. To date, the SEC has approved only commodity-trust ETFs for which there have been well-regulated futures markets for the underlying commodity and where the securities exchanges and futures exchanges entered into surveillance-sharing agreements. The SEC found those conditions not to be met in the case of bitcoins. The CFTC has taken the position that bitcoins are “commodities” under the CEA. Bitcoin spot markets are not required to register with the CFTC unless they offer leveraged, margined or financed trading to retail customers. In all other cases, the CFTC does not regulate bitcoin spot markets, such as the Gemini Exchange, although it does regulate bitcoin derivatives markets. The SEC concluded that the rules of the Bats BZX Exchange with respect to a bitcoin trust did not adequately prevent fraud and manipulation or protect investors and the public interest.
A copy of the Bitcoin Order is available at: https://www.sec.gov/rules/sro/batsbzx/2017/ 34-80206.pdf.
CFTC’s Enforcement Division Issues New Advisories on Cooperation
On January 18, 2017, the CFTC’s Division of Enforcement issued two advisories outlining criteria it considers when evaluating the cooperation of individuals and corporations in CFTC investigations. The advisories were part of an ongoing effort by the Division of Enforcement intended to increase transparency and incentivize full and truthful cooperation. Among the discretionary considerations set forth in the advisories were:
■ the value of the cooperation to the enforcement action (or investigation), specifically analyzing whether the cooperation was material to the investigation; came in a timely manner; was truthful, specific, complete and reliable and voluntary in nature; and the quality of the cooperation;
■ the value of the cooperation to the CFTC’s broader programmatic law enforcement interests, specifically focusing on how such cooperation influences other individuals or entities to cooperate; and if it furthers the Commissions priority investigations or identifies broad industry-wide concerns;
■ the level of culpability of the individual or entity, including an evaluation of prior misconduct and any mitigation and remediation efforts; and
■ any uncooperative actions that may offset the usefulness of the cooperation.
A copy of the advisories are available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfadvisorycompanies011917.pdf; and http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfadvisoryindividuals011917.pdf.
Delegated Regulation Published Amending the EU Margin Rules
On February 25, 2017, Commission Delegated Regulation (EU) 2017/323 (the Delegated Regulation) was published in the Official Journal of the EU. The Delegated Regulation amends the EU margin rules for uncleared OTC derivative contracts (the EU Margin Rules), which were published in December 2016 and entered into force on January 4, 2017, to correct a technical error. The amendments set forth in the Delegated Regulation provide that where there is an intragroup transaction between an EU entity and a third country entity, those entities will not be required to exchange variation margin until three years after the entry into force of the EU Margin Rules where there has been no equivalence decision with regard to the margin regime of the applicable third country. Where there is such an equivalence decision, the Delegated Regulation will apply on the later of: (i) four months after the entry into force of the equivalence decision or (ii) the date determined according to the general timeline set out in the EU Margin Rules.
A copy of the Delegated Regulation is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0323&from=EN.
Consultation on Operations of the European Supervisory Authorities
On March 21, 2017, the EC published a consultation (the Consultation) to review the regulations on ESMA, the European Banking Authority and the European Investment and Occupational Pensions Authority (collectively, the European Supervisory Authorities or ESAs). The purpose of the Consultation is to promote supervisory cooperation between the ESAs and grant them enhanced powers of direct supervision.The deadline for responses is May 16, 2017.
A copy of the Consultation is available at: https://ec.europa.eu/info/sites/info/files/2017-esas-operations-consultation-document_en.pdf.
UK Financial Conduct Authority Statement on Variation Margin Deadline under EMIR
On February 23, 2017, the UK Financial Conduct Authority (FCA) published a statement in relation to the March 1, 2017 deadline for the exchange of variation margin by in-scope counterparties under the EU Margin Rules. The statement makes clear that the FCA expects firms to be able to demonstrate that they have made best efforts to achieve full compliance with the March 1, 2017 compliance deadline but that it is aware that not all firms will be able to meet this deadline. The FCA intends to take a risk-based approach to supervision and does, however, expect firms to be compliant in the months following the deadline. The FCA’s statement echoes those made by the Joint Committee of ESAs and by IOSCO, which were also published on February 23, 2017.
A copy of the FCA statement is available at: https://www.fca.org.uk/news/news-stories/fca-statement-emir-1-march-2017-variation-margin-deadline.
A copy of the Joint Committee of ESAs’ statement is available at: https://esas-joint-committee.europa.eu/Publications/Statements/Statement%20-%20Variation%20margin%20exchange%20under%20the%20EMIR%20RTS%20on%20OTC%20derivatives.pdf.
A copy of the IOSCO statement is available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD556.pdf.
The MiFID II implementation process, which will affect many aspects of derivatives regulation in the EU, continues to progress toward the January 3, 2018 start date. On April 5, 2017, ESMA published an updated MiFID II Q&A document on commodity derivatives (the Updated Q&A) which covers both position limits and ancillary activity.
A copy of the Updated Q&A is available at: https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-28_cdtf_qa.pdf.
Hong Kong
Hong Kong Securities and Futures Commission Extends Eligible Indices of Leveraged and Inverse Products for Public Offerings in Hong Kong
Commencing January 9, 2017, the Hong Kong Securities and Futures Commission (SFC) has accepted authorization applications for Leveraged and Inverse Products (L&I Products) listed on the Stock Exchange of Hong Kong Limited (SEHK) that track (i) liquid and broadly based Hong Kong and non-Mainland foreign equity indices; and (ii) certain non-equity indices, provided that such indices fulfill the relevant requirements of the SFC’s Code on Unit Trusts and Mutual Funds. Previously, L&I Product providers were limited to issuing products on non-Hong Kong, non-Mainland foreign equity indices only. At this stage, the SFC has made no plans to extend the eligible indices to Mainland indices.
Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/ circular/doc?refNo=16EC70; and http://www.hkex.com.hk/eng/newsconsul/hkexnews/ 2016/161223news.htm.
Hong Kong Monetary Authority Issues Finalized Supervisory Policy on Margin and Other Risk Mitigation Standards for Non-Centrally Cleared OTC Derivatives
On January 27, 2017, the Hong Kong Monetary Authority (HKMA) issued the final Supervisory Policy Manual section CR-G-14 titled “Non-Centrally Cleared OTC Derivatives Transactions – Margin and Other Risk Mitigation Standards,” which sets out the margin requirements and risk mitigation standards for non-centrally cleared OTC derivatives undertaken by authorized institutions (AIs). Under the new requirements, a non-centrally cleared OTC derivative transaction between an AI and a “covered entity” (i.e., a financial counterparty or a significant non-financial counterparty) entered into after the date on which the exchange of relevant margins takes effect may be subject to a requirement to collect or post margin.
The margin provisions and risk mitigation standards are subject to an initial six-month transition period from March 1 to August 31, 2017. During this period, the HKMA expects AIs to start exchanging margin and applying the risk mitigation standards as soon as possible after the commencement date, and make reasonable and continuous progress to achieve full compliance by August 31, 2017.
A copy of Policy Manual section CR-G-14 is available at: http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-14.pdf.
A copy of the full Policy Manual is available at: http://www.hkma.gov.hk/eng/key-functions/banking-stability/supervisory-policy-manual.shtml.
Updates from the Hong Kong Monetary Authority’s OTC Derivatives Trade Repository
The HKMA published updates and clarification notes to the Supplementary Reporting Instructions for OTC Derivatives Transactions and the Supplementary Reporting Instructions for OTC Derivatives Transactions–Part 2 (together, the SRIs) on January 27 and February 28, 2017 respectively. The updates and notes to the SRIs provide corporations licensed by the Hong Kong Securities and Futures Commission with reporting instructions for back loading and reporting of valuation transaction information in relation to forward rate agreements and a postponement notification in relation to new reporting requirements for novation transactions.
Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/ circular/doc?refNo=16EC69; http://www.sfc.hk/edistributionWeb/gateway/EN/circular/ doc?refNo=17EC3; http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=17EC11; and http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=17EC15.
Hong Kong Securities and Futures Commission Standardizes Rules for Prescribing Professional Investors
On March 1, 2017, the SFC launched a consultation on proposed amendments to the Securities and Futures (Professional Investor) Rules (PI Rules). The PI Rules are subsidiary legislation promulgated under the Securities and Futures Ordinance (SFO). Specifically, the PI Rules prescribe additional categories of persons who may be treated as “professional investors” under the SFO.
If adopted, one of the proposed amendments to the PI Rules would allow joint accounts with non-associates and assets held in investment vehicles owned by individuals to be counted in determining whether individuals meet the monetary threshold to qualify as “professional investors.” In addition, the categories of “professional investors” would be expanded to include: (i) corporations that have ‘investment holding’ as their principal business and are wholly owned by one or more professional investors; and (ii) corporations that wholly own another corporation that is a qualified professional investor. The SFC would also recognize alternative forms of evidence that may be used to demonstrate an individual’s qualification as a professional investor (e.g., use of public filings made under legal or regulatory requirements, and certificates issued by custodians, auditors or certified public accountants for all professional investors) if the proposed amendments are adopted.
Further information is available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR17; and http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=17CP1.
Hong Kong Securities and Futures Commission Expands Scope of Short Position Reporting
Following the completion of a two-month pilot testing of the Short Position Reporting Service, market participants are required, effective March 15, 2017, to report short positions in all designated securities eligible for short selling as specified by the SEHK. The additional reporting requirements that apply to such designated securities include a reporting threshold of 0.02 percent of the concerned listed issuer’s market capitalization or HKD30 million (whichever is lower), while the threshold for collective investment schemes will be set at HKD30 million. The SFC has reminded market participants to ensure that they have appropriate systems and procedures in place to comply with the new short position reporting requirements.
Further information is available at: https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR12; http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR97; http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR145; and http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR28.
Hong Kong Exchanges and Clearing Limited Advances the Preparatory Work for Bond Connect
On March 15, 2017, the Hong Kong Exchanges and Clearing Limited (HKEx) welcomed the announcement by the Premier of the State Council of China in relation to setting up bond market links between Hong Kong and Mainland China (the Bond Connect). HKEx anticipates that the Bond Connect will represent a major breakthrough in the development of the Mainland Chinese capital markets and further strengthen the role of Hong Kong as a gateway between Mainland Chinese and other international markets.
HKEx is progressing with the preparatory work for Bond Connect under the guidance of the Mainland Chinese and Hong Kong authorities. Further details regarding Bond Connect will be announced at a later stage.
Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/ 2017/170315news.htm.
Hong Kong Exchanges and Clearing Limited Introduces the First Options on a Real Estate Investment Trust in Hong Kong
On March 16, 2017, HKEx announced that it will introduce options on the stock exchange including the securities of Link Real Estate Investment Trust (Link REIT Options) and ACAC Technologies Holdings Inc. to further strengthen the options market. The Link REIT Options are the first options of a real estate investment trust to be traded on HKEx. The introduction of such Link REIT Options will have a contract size of 1,000 units. The months in which the Link REIT Options expire are April, May, June, July, September and December of 2017 and March of 2018. The trading of such options on HKEx commenced on April 10, 2017.
Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/ 2017/170316news.htm; http://www.hkex.com.hk/eng/market/partcir/sehk/2017/Documents/MKD_EQD_03_17_e.pdf; and http://www.hkex.com.hk/eng/prod/drprod/so/classlist_so.htm.
Hong Kong Exchanges and Clearing Limited Launches its First Renminbi Currency Options
On March 20, 2017, HKEx launched RMB Currency Options in the Hong Kong market. The first currency options traded on HKEx were the U.S. Dollar-Offshore RMB (USD/CNH) Options (USD/CNH Options). Such USD/CNH Options have a contract size of US$100,000 and an official settlement price being the “USD/CNY (HK) Spot Rate” published by the Hong Kong Treasury Markets Association at or around 11:30 a.m. on the expiry day of the options.
The USD/CNH Options contract months comprise April, May, June, July, September and December of 2017, and March and June of 2018. The SEHK anticipates that the USD/CNH Options will complement HKEx’s USD/CNH Futures and other RMB Currency Futures that offer a high degree of liquidity among global exchanges.
Futures Exchange Participants can apply to serve as liquidity providers for USD/CNH Options.
Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/ 2017/170104news.htm; http://www.hkex.com.hk/eng/newsconsul/hkexnews/2017/170216news.htm; http://www.hkex.com.hk/eng/stat/dmstat/dayrpt/cuso170320.htm; and https://www.hkex.com.hk/eng/prod/drprod/rmb/USDCNHOptions.htm.
Hong Kong Securities and Futures Commission Expands the Scope of Position Limit Regime
On March 21, 2017, the SFC announced its conclusions to a consultation that was launched on September 20, 2016 in relation to expanding the scope of the position limit regime. The SFC concluded that the proposals (the Proposals) in respect of the Client Facilitation Excess Position Limit, Exchange-Traded Funds (ETFs) Market Maker Excess Position Limit, Index Arbitration Activity Excess Position Limit, Asset Manager Excess Position Limit and Stock Options Contracts Position Limit, will need to be implemented and associated amendments to the Securities and Futures (Contracts Limits and Reportable Positions) Rules (CLRP Rules) will be required.
The Proposals include: (i) raising the cap on the Client Facilitation Excess Position Limit from 50 percent to 300 percent; (ii) introducing a statutory position limit of 150,000 contracts for stock options; (iii) relaxing the excess position limits for index arbitrage activities and market makers of ETFs; and (iv) lowering the minimum assets under management requirement applicable to asset managers from HKD100 billion to HKD 80 billion. Subject to the legislative process, the SFC plans for the amended CLRP Rules to come into effect on June 1, 2017.
Further information is available at:http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR38; http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=16CP3; and http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP3.
OTC Clearing Hong Kong Limited Launches New Service Enabling Non-Member Financial Institutions to Enjoy the Capital Efficiency of Central Clearing
On March 21, 2017, OTC Clearing Hong Kong Limited (OTC Clear) launched a client clearing service following approval from the SFC. Under the new client clearing service regime, if an OTC derivative market participant chooses not to become a Clearing Member of OTC Clear, that OTC derivative market participant may continue to fulfil the mandated regulatory obligations, along with the credit and capital efficiency benefits of central clearing, by establishing a “client clearing” relationship with an existing Clearing Member of OTC Clear that will act as an intermediary, or “broker.”
OTC Clear has also received the SFC’s approval to allow the acceptance of certain types of high-quality, non-cash collateral from its clearing participants to satisfy OTC Clear’s margin requirements. The assets that OTC Clear will initially accept include U.S. Treasuries, Hong Kong Exchange Bills and Notes and offshore bonds issued by the Ministry of Finance of the People’s Republic of China.
Further information is available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/ 2017/170321news.htm; and https://www.hkex.com.hk/eng/prod/clr/otcclrsett/otccdclr.htm.
Hong Kong Exchanges and Clearing Limited Introduces the First Futures on Domestic Chinese Government Bonds
On March 24, 2017, HKEx announced the introduction of five-year China Ministry of Finance Treasury Bond Futures (MOF T-Bond Futures) that aim to manage offshore interest rate risk in the RMB fixed income space by using onshore Chinese government bonds as a benchmark. Trading of MOF T-Bond Futures was subsequently launched on April 10, 2017, becoming the offshore markets’ first futures on domestic Chinese government bonds.
MOF T-Bond Futures are currently trading in RMB, with prices determined by the Mainland China Central Depository and Clearing Co Ltd, or ChinaBond, in accordance with the HKEx’s methodology and procedures. HKEx has invited Futures Exchange Participants (FEPs) to apply to serve as liquidity providers for MOF T-Bond Futures, and is planning a joint promotion program with such FEPs to provide sponsorship for marketing activities and support for product promotion.
Further information is a available at: http://www.hkex.com.hk/eng/newsconsul/hkexnews/ 2017/1703242news.htm; http://www.hkex.com.hk/eng/market/partcir/hkfe/Documents/MKD_FIC_007_17_E.pdf; and http://www.hkex.com.hk/eng/prod/drprod/moftf/moftf.htm.
Publication of Hong Kong Monetary Authority’s Risk Mitigation Standards Amendment Agreement
On April 12, 2017, ISDA published an Amendment Agreement (the Amendment Agreement) relating to risk mitigation standards for non-centrally cleared OTC derivatives of the HKMA. The Amendment Agreement allows parties to a Covered Master Agreement to amend the terms to reflect the portfolio reconciliation and dispute resolution requirements under the risk mitigation standards imposed by the HKMA.
Further information is available at: http://www.isda.org/publications/regulatorydocumentation.aspx.
China
China Allows Foreign Bond Investors in the Interbank Bond Market to Trade Derivatives
On February 24, 2017, the State Administration of Foreign Exchange issued a notice to allow foreign institutional investors in China’s interbank bond market to trade foreign exchange derivatives via qualified domestic financial institutions with immediate effect. Such foreign exchange derivatives include forwards, foreign exchange swaps, currency swaps and options. Foreign investors must conduct derivatives trading based on the principle of actual transaction need and only to hedge the foreign exchange risk exposure incurred by their bond investments.
Further information is available at: http://www.safe.gov.cn/wps/portal/!ut/p/c5/04_SB8K8xLLM9MSSzPy8xBz9CP0os3gPZxdnX293QwML7zALA09P02Bnr1BvI2c_E_1wkA6zeGd3Rw8Tcx8 DAwsTdwMDTxMnfz8P50BDA09jiLwBDuBooO_nkZ-bql-QnZ3m6KioCACk6Xh-/dl3/d3/L2dJQSEvUUt3QS9ZQnZ3LzZfSENEQ01LRzEwODRJQzBJSUpRRUpKSDEySTI!/?WCM_GLOBAL_CONTEXT=/wps/wcm/connect/safe_web_store/safe_web/zcfg/whscyrmbhn/node_zcfg_whjy_store/2dac8f804039387a8470849bf511075d.
The content of this publication is for informational purposes only and does not constitute legal advice. This publication is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon the information presented herein without seeking advice from professional advisers. The information included in this publication is provided by individual contributors and does not reflect views of Sidley Austin LLP.
Sidley Derivatives | Q1 2017 • 17
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