eu us derivatives june 2015

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Summary of key EU and US

regulatory developments relating

to derivatives

Summary of key EU and US regulatory developments relating to derivatives June 2015 1

Hogan Lovells advises clients across the world on acomplete range of derivative and structured producttransactions across all asset classes.

Our practice is truly global. With dedicated derivativesand structured products lawyers in Europe, the UnitedStates and Asia and capital markets lawyers across ourglobal network of offices, we have one of the largest,most integrated teams in the market.

We understand the considerable and complex legal,regulatory, and tax implications of these products,including the cross-border implications of their use.Working closely with lawyers in our renowned finance,disputes, tax, regulatory and insolvency departments,we provide our clients with practical, timely advice on allaspects of their business. We have significantexperience in advising clients on the regulatoryuniverse applicable to derivatives across the world:from the United States under Dodd-Frank, theEuropean Union under the European MarketInfrastructure Regulation and jurisdictions across Asia.In addition, our team is particularly strong in structuredfinance and structured finance-related derivatives,having established and updated many securitizationand repackaging programs that contain swaps andrepos.

Our clients include major financial institutions, funds,government sponsored entities, issuers and commercialend-users. Our size, global reach, experience andspecialization enable us to provide clients with acompetitive, knowledge-based service for all derivativesand structured products transactions.

"Developing its excellent track record ininternational securitisation transactions andmaintaining a strong profile for structured financeand derivatives work."

Chambers Global, 2014

Our Global Derivatives and Structured Products Practice

Areas of focus

• Energy and commodities

• Other commodities and metals

• Regulatory matters

• Longevity and insurance linked derivatives

• Equity derivatives

• Securitized derivatives programmes

• Credit derivatives

• Fund derivatives

• Structured finance, securitization-related and otherfixed income derivatives

• Distressed derivatives

2 Summary of key EU and US Regulatory Developments relating to derivatives June 2015

Following the G20 commitment to implement measures toincrease transparency and reduce counterparty credit risk andoperational risk in the derivative markets, the EuropeanCommission introduced a new EU Regulation on over-the-counter derivatives (OTC), central counterparties (CCPs) andtrade repositories (also known as the European MarketInfrastructure Regulation, EMIR). In addition, the EuropeanParliament and the European Council have adopted adirective and regulation replacing the Markets in FinancialInstruments Directive (known as MiFID II). Simultaneously, inthe United States, the Dodd-Frank Wall Street Reform andConsumer Protection Act (Dodd-Frank) seeks to deal withsimilar risk issues in relation to derivatives markets. Insummary, the new requirements introduce:

• clearing obligation and risk mitigation techniques forcertain derivative contracts;

• trade reporting;• registration, financial and risk management requirements

for clearing organizations; and• new trade execution requirements.

EMIR entered into force on 16 August 2012, although anumber of provisions in EMIR require the European Securitiesand Markets Authority (ESMA) to develop draft technicalstandards, some of which came into force on 15 March 2013and certain obligations (timely confirmation, mark to marketand the NFC notification requirement) applied from this date.Other risk mitigation obligations (portfolio reconciliation,portfolio compression and dispute resolution) applied 6months after this date, from 15 September 2013. Tradereporting obligations commenced on 12 February 2013.ESMA, together with the European Banking Authority (EBA)and the European Insurance and Occupational Authority(EIOPA) (together, the ESAs) on 10 June 2015 issued asecond consultation on the draft technical standards inrelation to the margin requirements for uncleared OTCderivative contracts, which is expected to be finalized in thecoming months.

On 21 May 2015 the European Commission published aconsultation document on the implementation of EMIR,seeking feedback from stakeholders on those aspects ofEMIR which have already been implemented. The EuropeanCommission will then submit a general report on EMIR to theEuropean Parliament and European Council, together withany appropriate proposals.

James DoylePartner, LondonT +44 20 7296 [email protected]

David HuddPartner, LondonT +44 20 7296 [email protected]

Sharon LewisPartner, ParisT +33 (1) 5367 [email protected]

Evan M KosterPartner, New YorkT +1 212 918 [email protected]

Dennis DillonPartner, LondonT +44 20 7296 [email protected]

Bronwen MayPartner, Hong KongT +852 2840 [email protected]

Katia MerliniOf Counsel, ParisT +33 (1) 5367 [email protected]

Isobel WrightProfessional Support Lawyer, LondonT +44 20 7296 [email protected]

Overview


Derivatives

Subject Summary of EU provisions Summary of US provisions

Definition of swap EMIR Article 2(5)

EMIR applies to all standardized eligible OTCderivatives, including interest rate, credit,equity, foreign exchange derivatives andcommodity OTC derivative contracts, theexecution of which does not take place on aregulated market.

Foreign exchange (FX) derivatives

The treatment of foreign exchange derivativesis subject to some uncertainty as the definitionof derivative in EMIR cross-refers to the list offinancial instruments in MiFID, which has beentransposed differently across Member States.Although the European Commission hascommented that "clearing obligations areunlikely to be imposed on deliverable foreignexchange transactions without an industryinitiative", it has also: (i) reiterated that there isno express power for it to exempt foreignexchange transactions generally from therequirements of EMIR; and (ii) highlighted itsconcern that such an exemption potentiallycould lead to undesirable regulatory arbitrage.The European Commission has held aconsultation on FX instruments (which closedon 9 May 2014) and intends to publish aformal commission proposal on where theboundary lies between what is an FX financialinstrument and a spot FX contract.

The Financial Conduct Authority (the FCA)has said that, until further notice, in the UnitedKingdom, FX forwards undertaken forcommercial purposes and FX and commodityspot transactions are outside the scope ofMiFID II and therefore should not fall withinEMIR.

Dodd-Frank Section 721(a)

Commodity Exchange Act 7 USC 1A(47)

Divided into "swaps" and "security-basedswaps."

In November 2012, the US Secretary of theTreasury exempted FX swaps from thedefinition of "swap."

Final Rule 17 CFR Parts 1, 230, 240 and 241

"Swaps" include interest rate swaps, rate floors,rate caps, rate collars, cross-currency rateswaps, basis swaps, currency swaps, totalreturn swaps, equity index swaps, equity swaps,debt index swaps, debt swaps, credit spreads,credit default swaps, credit swaps, weatherswaps, energy swaps, metal swaps, agriculturalswaps, emission swaps and commodity swaps."Swaps" also include any agreement, contract,or transaction that is, or in the future becomes,commonly known to the trade as a swap.

Forward contracts in non-financial commoditiesare excluded from the definition of “swap.”

In May 2015, the Commodity Futures TradingCommission (the CFTC) published its finalinterpretation as to when forward contacts “withembedded volumetric optionality” would fallwithin the “forward contract exclusion” from thedefinition of a swap.

Forward contracts “with embedded volumetricoptionality” are forward contracts for the sale ofa commodity, but where one party has the right— but not the obligation—to increase ordecrease the volume of the commodity intendedto be physically settled or delivered under theforward contract.

Summary of key EU and US regulatory developments relating toderivatives



In attempting to address this issue, theCommission has suggested, in a letter toESMA dated 23 July 2014, that betweenthemselves they are in agreement withregards defining FX spot contracts.

Commodity derivatives (MiFID I)

On 6 May 2015, ESMA released guidelines onthe definition of "commodity derivatives" forthe purposes of Sections C6 and C7 ofSchedule I in the MiFID I Directive. Inparticular, according to the existing MiFID Idefinition, these categories of derivatives mustbe "physically settled" in order to be within thescope of MiFID I. The ESMA guidelines detailthe meaning of "physically settled" for thesepurposes. The guidelines will apply with effectfrom August 2015, and will only apply as longas MiFID I remains in force. MiFID I will bereplaced by MiFID II from January 2017.

The final interpretation provides a seven-parttest to determine whether such a contact wouldbe excluded from the definition of a “swap”.The seven-part test requires that:

• the embedded optionality does notundermine the overall nature of theagreement, contract, or transaction as aforward contract;

• the predominant feature of the agreement,contract, or transaction is actual delivery;

• the embedded optionality cannot besevered and marketed separately from theoverall agreement, contract, or transactionin which it is embedded;

• the seller of a non-financial commodityunderlying the agreement, contract, ortransaction with embedded volumetricoptionality intends, at the time it enters intothe agreement, contract, or transaction, todeliver the underlying nonfinancialcommodity if the embedded volumetricoptionality is exercised;

• the buyer of a non-financial commodityunderlying the agreement, contract ortransaction with embedded volumetricoptionality intends, at the time it enters intothe agreement, contract, or transaction, totake delivery of the underlying non-financialcommodity if the embedded volumetricoptionality is exercised;

• both parties are commercial parties; and

• the embedded volumetric optionality isprimarily intended, at the time that theparties enter into the agreement, contract,or transaction, to address physical factors,or regulatory requirements that reasonablyinfluence demand for, or supply of, the non-financial commodity.

Securities Exchange Act of 1934 Section3(a)(68)(A).

A security-based swap is defined as anagreement, contract or transaction that is aswap and is based on:

• an index that is a narrow-based securityindex, including any interest therein or onthe value thereof;



• a single security or loan, including anyinterest therein or on the value thereof;

• the occurrence, non-occurrence or extent ofoccurrence, or of an event relating to asingle issuer of a security or the issuers ofsecurities in a narrow-based security index,provided that such event directly affects thefinancial statements, financial condition, orfinancial obligations of the issuer."

Significant participants EMIR Article 10

The application of certain parts of EMIR willdepend on which of the following categoriesan entity falls in:

• financial counterparties (broadly, banks,insurers, investment firms, pensionschemes, certain alternative investmentfunds (AIFs) and UCITS funds)established in the EU (FCs);

• non-financial counterparties (NFCs)established in the EU whose aggregatepositions exceed the clearing thresholds(see below) (NFC+s) (this is conceptuallyanalogous to the "MSP" designation in USregulations); and

• NFCs established in the EU whoseaggregate positions are below the clearingthreshold (NFC-).

As of 15 March 2013, NFC+s (ie NFCs thatexceed the clearing threshold) must notifyESMA and their EU Member State competentauthority (NFC notification).

Dodd-Frank Section 761

7 USC 1a(11), 7 USC 1a(33), 7 USC 1a(49)

"Major swap participant" (MSP) is someone whois not a dealer and (i) maintains a substantialposition in swaps for any of the major swapcategories as determined by CFTC (exceptpositions held for hedging or mitigatingcommercial risk or maintained by employeebenefit plans); (ii) whose outstanding swapscreate substantial counterparty exposure thatcould have serious adverse effects on thefinancial stability of the US banking system orfinancial markets; or (iii) a financial entity that ishighly leveraged relative to the amount ofcapital it holds and that is not subject to capitalrequirements established by an appropriateFederal banking agency and maintains asubstantial position in outstanding swaps in anymajor swap category as determined by CFTC.

"Commodity pool operator" is someone who isengaged in a business that is of the nature of acommodity pool, investment trust, syndicate, orsimilar form of enterprise, and who, inconnection therewith, solicits, accepts, orreceives from others, funds, securities, orproperty for the purpose of trading in commodityinterests, including any:

• commodities for future delivery, securityfutures products, or swaps;

• commodity options; and

• leverage transactions.

De minimis exception from registering as acommodity pool operator:

• The aggregate initial margin, premiums, andrequired minimum security deposit for retailforex transactions required to establishcommodity interest positions, determined atthe time the most recent position was



established, does not exceed 5 per cent ofthe liquidation value of the pool's portfolio; or

• The aggregate net notional value ofcommodity interest positions, determined atthe time the most recent position wasestablished, does not exceed 100 per centof the liquidation value of the pool's portfolio,after taking into account unrealized profitsand unrealized losses on any such positionsit has entered into.

Clearing thresholds (EMIR Article 10 (3))

The clearing threshold values which, ifexceeded, would subject NFCs to the clearingobligation are:

• credit derivatives - EUR 1 billion in grossnotional value;

• equity derivatives - EUR 1 billion in grossnotional value;

• interest rate derivatives - EUR 3 billion ingross notional value;

• FX derivatives - EUR 3 billion in grossnotional value; and

• commodity and any other OTC derivatives

- EUR 3 billion in gross notional value.

The notional value adds up the nominal valueof all outstanding OTC derivative contracts ofthe group of the relevant NFC on a worldwidebasis, whether they are in or out of the money.

If an NFC exceeds the clearing threshold inrespect of any of the above asset classes, theclearing obligation will apply to all clearableOTC derivatives, irrespective of the assetclass but subject to the exemptionshighlighted below.

"Swap dealer" is any person who: (i) holds itselfout as a dealer in swaps; (ii) makes a market inswaps; (iii) regularly enters into swaps withcounterparties as an ordinary course ofbusiness for its own account; or (iv) engages inany activity causing the person to be commonlyknown in the trade as a dealer or market makerin swaps, provided however, in no event shallan insured depository institution be consideredto be a swap dealer to the extent it offers toenter into a swap with a customer in connectionwith originating a loan with that customer.

A person may be designated as a swap dealerfor one category of swaps and not beconsidered a swap dealer for another categoryof swaps. A person that enters into swaps forsuch person’s own account, either individuallyor in a fiduciary capacity, but not as a part of aregular business, is not a "swap dealer." Entitiesthat engage in a de minimis quantity of swapdealing are exempt from the swap dealerdefinition.

Swap dealer registration

• There is an exemption from registration as aswap dealer for firms that have anaggregate gross notional amount of swapsentered into over the prior 12-month periodthat is not greater than $3 billion, althoughthe threshold initially will be set at $8 billionfor at least a three-year phase-in period.

• For firms engaging in security-based swapsbusiness, the exemption threshold is $3billion in notional value over a 12-monthperiod for credit default swaps (CDS) and$150 million for other types of security-based swaps.

• The exemptions will be phased-in at $8billion in notional value for swaps and CDSsand $400 million in notional value for othertypes of security-based swaps.



• Ninety-six entities have provisionallyregistered with the CFTC as swap dealers.

Swaps that satisfy certain hedging criteria or areentered into in conjunction with loans originatedby a federally backed bank will not be countedtowards the swap dealer threshold.

Major Swap Participant: Substantial position

• The final rule applies two different tests todetermine whether a person has a"substantial position" in swaps or security-based swaps.

• A substantial position is a daily averagecurrent uncollateralized exposure of at least$1 billion for the applicable swap or security-based swap category (or $3 billion for therate swap category) or a daily averagecurrent uncollateralized exposure pluspotential future exposure of $2 billion for theapplicable swap or security-based swapcategory (or $6 billion for the rate swapcategory). A position satisfying either testwill constitute a "substantial position."

Major swap participant: Substantialcounterparty exposure

• "Substantial counterparty exposure" iscalculated using the same method as"substantial position," but substantialcounterparty exposure is not limited to majorcategories of swaps and does not excludehedging or employee benefit plan positions.

• The swap thresholds across the entirety of aperson’s swap positions are $5 billion ofcurrent uncollateralized exposure or $8billion of current uncollateralized exposureand potential future exposure.

• The security-based swap thresholds acrossthe entirety of a person’s security-basedswap positions are $2 billion of currentuncollateralized exposure or $4 billion ofcurrent uncollateralized exposure andpotential future exposure.

Financial entity and highly leveraged

A financial entity is "highly leveraged" where theratio of its liabilities to its equity exceeds 12-to-1.



Major swap participant and major security-based swap participant safe harbors.

Persons that satisfy any one of threealternatives are exempt from the dailycalculations required by the "substantialposition" tests.

Clearing EMIR Article 4

Under Article 4 of EMIR, all FCs, as well asNFC+s, will have to clear OTC derivativetransactions that are within a class of OTCderivatives which ESMA has declared to besubject to mandatory clearing. Transactionswith NFC-s will not be subject to the clearingobligation.

There are two approaches for assessingwhether a class of OTC derivatives is subjectto clearing.

• When a competent authority notifies ESMAthat it has authorized a CCP to clear aclass of OTC derivatives, ESMA willconduct a public consultation to determinewhether the clearing obligation shouldapply and develop regulatory technicalstandards (the "bottom up" approach); and

• ESMA will identify classes of derivativeswhich should be subject to the clearingobligation but for which no CCP hasreceived authorisation (the "top down"approach).

To date 16 CCPs established in the EU havebeen authorised under EMIR.

ESMA must develop regulatory technicalstandards within 6 months of receiving anotification from a competent authority.

To date, ESMA has published final regulatorytechnical standards (RTS) in respect of theclearing of certain classes of interest rateswaps and draft regulatory technicalstandards in respect of the clearing of certainclasses of credit derivatives and FX non-deliverable forwards.

Lord Hill has announced that the EuropeanCommission has finalised its discussions withESMA and is starting the process of gettingthe first clearing obligations adopted by theEuropean Commission, which means that thefirst clearing obligations for certain interestrate swaps might be in place from April 2016.

Dodd-Frank Section 723(a)(3)Commodity Exchange Act (7 USC 2(h)(1))

Final Rule 17 CFR Parts 1, 23, 37, 38 and 39

Swaps that are required to be cleared must becleared by CCPs known as derivatives clearingorganizations (DCOs) as soon astechnologically practicable after execution of theswap, but no later than the close of business onthe day of execution.

If a swap is not required to be cleared but isaccepted for clearing by a DCO, and the swapdealer or major swap participant and itscounterparty agrees that the swap will besubmitted for clearing, the swap must besubmitted for clearing no later than the nextbusiness day after execution, or the agreementto clear, if later than execution.

Each swap dealer or major swap participant thatis a clearing member of a DCO shall coordinatewith each DCO on which it clears to establishsystems that enable the clearing member, orthe DCO acting on its behalf, to accept or rejecteach trade submitted to the DCO for clearing byor for the clearing member as quickly as wouldbe technologically practicable if fully automatedsystems were used.

Mandatory Swap Clearing

Mandatory clearing for specified classes ofinterest rate and credit default swaps went intoeffect in March 2013 for certain entities, with aphased compliance schedule roll-out through toSeptember 2013.

Interest rate swaps subject to mandatoryclearing are fixed-to-floating swaps, basisswaps and forward rate agreements that arespecified in U.S dollar, Euro and British pound.To fall under the clearing requirement, theswaps must be based on specified floating rateindexes and must have termination dates thatfall into prescribed ranges. The four classesselected for mandatory clearing account for



Interest rate swaps

ESMA has proposed that the following classesof interest rate swaps (with no optionality andwith a single settlement currency) should besubject to the clearing obligation:

• Float-to-float "basis" swaps andFixed-to-float interest rate swaps,referencing either EURIBOR orLIBOR, with a maturity of 28 days to50 years (this includes instrumentswhich settle in Euros, US dollars,GBP or Japanese yen);

• Forward Rate Agreements,referencing either EURIBOR orLIBOR, with a maturity of 3 days to 3years (this includes instrumentswhich settle in Euros, US dollars orGBP); and

• Overnight Index Swaps referencingEONIA, FedFunds or SONIA, with amaturity of 7 days to 3 years (thisincludes instruments which settle inEuros, US dollars or GBP).

In addition, ESMA has also proposed that thefollowing classes should be subject to theclearing obligation:

• Fixed-to-float interest rate swapsdenominated in CZK, DKK, HUF,NDK, PLN, with a maturity of 28 daysto 50 years; and

• Forward rate agreementsdenominated in NDK, PLN and SEKwith a maturity of 3 days to 1 year.

Credit derivatives

ESMA has proposed that the following creditOTC derivative classes (traded in Europe andsettled in EUR only) should be subject to theclearing obligation:

• Index CDS (untranched index)referencing iTraxx Europe Main; or

• iTraxx Europe Crossover indices,

in each case with a series of 11 onwards anda maturity period of five years.

more than 80% of the interest rate swap market.Swaps with optionality, multiple currency swapsand swaps with conditional notional amountsare not subject to mandatory clearing.

Credit default swaps subject to mandatoryclearing include North American UntranchedCDS Indices Class and European UntranchedCDS Indices Class.

Swap dealers, major swap participants,security-based swap dealers and majorsecurity-based swap participants are referred toas "Category 1 entities."

Commodity pools, private funds as defined inSection 202(a) of the Investment Advisers Actof 1940 other than active funds, and personspredominantly engaged in activities that are inthe business of banking, or in activities that arefinancial in nature as defined in Section 4(k) ofthe Bank Holding Company Act of 1956, arereferred to as "Category 2 entities."

Swaps between two Category 1 Entities had acompliance date of 11 March 2013 (26 April2013 for iTraxx CDS indices), while swapsbetween a Category 2 Entity and a Category 1Entity or another Category 2 Entity had acompliance date of 10 June 2013 (25 July 2013for iTraxx CDS indices). All other swaps forwhich neither counterparty is eligible to claim anexception from the clearing requirement had acompliance date of 9 September 2013 (23October 2013 for iTraxx CDS indices).

Dodd-Frank Section 763(a)

Securities Exchange Act of 1934 (15 USC78c-1(3C))

Security-based swaps that are required to becleared must be cleared by a clearing agency.The SEC has not yet issued any mandatoryclearing determinations for security-basedswaps.



FX non-deliverable forwards (FX NDFs)

Based on the feedback it received to itsconsultation on FX NDFs, ESMA has said thatit is not proposing a clearing obligation on theFX NDF classes at this stage.

Phase-in timing

In its final RTS, ESMA has proposed that theclearing obligations should take effectfollowing a phased implementation, dependingon the types of counterparties concerned.

Category 1 (clearing members): 6 monthsafter the entry into force of the RTS on theclearing obligation;

Category 2 (FCs and AIFs which are NFC+sbut not in Category 1 and which belong to agroup whose aggregate month-end averagenotional amount of non-centrally clearedderivatives for the 3 months after the month inwhich the RTS is published in the OfficialJournal is above EUR 8 billion): 12 monthsafter the RTS enters into force;

Category 3 (FCs and AIFs that are NFC+sand not in Category 1 or 2): 18 months afterthe RTS enters into force; and

Category 4 (NFC+s not in any of the abovecategories): 3 years after the RTS enters intoforce).

In order to ensure proportionate treatment withother counterparties, ESMA has said that theoriginal 3 year phase-in period for NFC+s willbe shortened progressively for subsequentRTS.

Third country entities will need to apply thesame criteria as their EU counterparties todetermine the category to which they wouldbelong if they were established in the EU soas to ensure equal treatment.

Where a contract is concluded between twocounterparties in different categories, the datefrom which the clearing obligation takes effectwill be the latest date.

There is an exemption for contractsassociated with covered bond programs whichmeet certain conditions.



Frontloading requirement

EMIR requires the application of the clearingobligation to contracts concluded after thenotification to ESMA of the authorisation of aCCP to clear a class of derivatives but beforethe date on which the clearing obligation takeseffect, provided that the contracts meet therelevant minimum remaining maturity.

On 18 December 2014 the EuropeanCommission sent a letter to ESMA stating itsintention to endorse with amendments thedraft RTS on the clearing obligation forinterest rate swaps and proposed certainamendments to the frontloading requirement.The start date for the frontloading requirementwill now be as set out below.

Category 1: 2 months after the entry intoforce of the RTS on the clearing obligation;and

Category 2: 5 months after the entry intoforce of the RTS on the clearing obligation.

The frontloading requirement is not applicableto contracts where: (i) one party is acounterparty in Category 3, given the longphase-in; or (ii) one party is an NFC+.

In order to comply with the clearing obligation,counterparties will need to establish clearingarrangements by becoming a clearingmember or a client of a clearing member or byestablishing indirect clearing arrangements(which must not increase counterparty risk).

ISDA has published: (i) the ISDA/FOA ClientCleared OTC Derivatives Addendum, which isa market standard document for use bycounterparties and their clearing memberswhich covers all types of derivative trades tobe cleared by CCPs; and (ii) the ISDA/ FIAEurope Cleared Derivatives ExecutionAgreement, for use by two swapcounterparties in respect of their OTCderivative trades that are subject to theclearing obligation. Parties may wish toconsult their legal counsel regarding thevarious elections that need to be made.

Parties to OTC derivative contracts that arenot cleared by a CCP will be required to put inplace risk mitigation techniques to mitigateoperational risk and counterparty credit riskunder Article 11 of EMIR (see below).



Exemptions from theclearing obligation

Commercial hedging exemption for NFCs

Trades entered into by NFCs for the purposesof commercial hedging or treasury activitieswhich are "objectively measureable asreducing risks directly in relation to thecommercial activity of the group or treasuryfinancing activity of the NFC or of that group"will not count towards the clearing thresholds(Article 10(2) of EMIR). The definition of"group" is determined by reference to whetheran entity is consolidated for the purposes ofthe relevant accounting standards. Thiscovers risks arising from the potential changein value of assets in the normal course ofbusiness (including proxy hedging and optionsarising from employee benefits), indirect risksand any OTC derivative contract that qualifiesas a hedging contract pursuant to theInternational Financial Reporting Standards(IFRS) principles on hedge accounting.The definition of 'group' under EMIR is notclear and it is not certain whether the definitionof 'group' could, in certain circumstances,include special purpose vehicles and bringderivative contracts entered into by specialpurpose vehicles within the clearingrequirements.

Intragroup exemption

Entities can apply for an intragroup exemptionfrom the clearing obligation under Article 3 ofEMIR if, broadly, both counterparties areconsolidated on a full basis and are subject toappropriate centralized risk and controlprocedures and, if a non-EU entity, the EUCommission has recognized the equivalenceof requirements in that non-EU country.Certain disclosure requirements will still applyhowever.

In its letter dated 18 December 2014, theEuropean Commission proposed thatintragroup transactions between acounterparty in the EU and a non-EUcounterparty which is part of the same groupshould be excluded from the clearingobligation for 3 years or until such time as theEuropean Commission has adoptedequivalence decisions. ESMA has sinceraised some concerns about this proposal.

There is also an intragroup exemption fromthe margin requirements if certain conditionsare met. There must be no current orforeseen practical or legal impediment to theprompt transfer of own funds or repayment ofliabilities between counterparties.

Commercial end-user exception

A commercial end-user exception applies tocounterparties who are non-financial entitiesthat are using security-based swaps to hedge ormitigate commercial risk. (15 USC 78c-1(3C)(g)(1)).

17 CFR Part 39

The clearing requirements do not apply toCFTC swaps if one of the counterparties is:

• a non-financial entity;

• is using the swap to hedge or mitigatecommercial risk; and

• notifies the CFTC how it generally meets itsfinancial obligations associated with non-cleared swaps.

A swap is used to hedge or mitigate commercialrisk if:

• the swap is economically appropriate to thereduction of the person’s risks in the conductand management of a commercialenterprise; and

• the risks arise from changes in values ofassets and liabilities, including changesrelated to movements of interest rates andforeign exchange rates.

Swaps eligible for the end-user exceptioncannot be used for speculation, investing ortrading.

To determine whether a counterparty is anonfinancial entity, the following needs to beconsidered:

• the CEA defines a financial entity as a swapdealer, a security-based swap dealer, anMSP, a major security-based swapparticipant, a commodity pool, a privatefund, certain types of benefit plans underERISA, or a person predominantly engagedin activities that are in the business ofbanking or in activities that are financial innature as defined in section 4(k) of the BankHolding Company Act of 1956;

• to be predominantly engaged in financialactivities, the entity generally must eitherdevote 85% or more of its assets to orderive 85% or more of its revenues fromfinancial activities;



Pension schemes

Certain pension schemes are initially exemptfrom the clearing obligation until 15 August2015, which can be extended.

On 5 June 2015 the European Commissionpublished a delegated act extending theexemption for certain pension schemes until16 August 2017.

Supranational bodies

Entities such as the ECB, national EU publicdebt management bodies, specifiedmultilateral development banks, and certainguaranteed public entities are outside thescope of EMIR.

• the list of financial activities in section 4(k) isbroad and includes activities such asinsurance underwriting and agency,securities brokerage, investment advisoryactivities, and financial data processing; and

• small ($10 billion or less in total assets)depository institutions, credit unions andfarm credit system institutions are alsoeligible for the commercial end-user

exception.

Captive finance companies

Commodity Exchange Act (7 USC 2(h)(7)(C))CFTC Letter No. 15-27

A “captive finance company” is permitted toelect the commercial end-user exceptionbecause it is excluded from the definition of"financial entity". To be a captive financecompany, an entity must satisfy a four-prongtest:

• the entity’s primary business is providingfinancing;

• the entity uses derivatives for the purpose ofhedging underlying commercial risks relatedto interest rate and foreign currencyexposures;

• 90% or more of such exposures arise fromfinancing that facilitates the purchase orlease of products; and

• 90% or more of such products aremanufactured by the parent company oranother subsidiary of the parent company.

The CFTC has also taken a position, in aninterpretive letter dated 4 May 2015, that awholly-owned special purpose vehicle of acaptive finance company can also be treated asa captive finance company and rely on thecommercial end-user exception.

Treasury affiliates

CFTC Letter No. 13-22

Swaps entered into by eligible treasury affiliatesare exempt from clearing provided certainconditions are met, including the following:

• treasury affiliate is directly, wholly-owned bya non-financial entity or another eligibletreasury affiliate and is not indirectlymajority-owned by a financial entity;



• treasury affiliate’s ultimate parent is not afinancial entity, and the majority of theultimate parent’s wholly and majority-ownedaffiliates qualify for the end-user exception;

• treasury affiliate is a financial entity solely asa result of acting as principal to swaps with,or on behalf of, one or more of its relatedaffiliates, or providing other financial servicesto such affiliates;

• treasury affiliate enters into the exemptedswap for the sole purpose of hedging ormitigating the commercial risk of one or morerelated affiliates that was transferred to thetreasury affiliate via one or more swaps withsuch related affiliates; and

• certain information regarding the unclearedswap is reported to a swap data repository.

Inter-affiliate exception

17 CFR Part 50

The clearing requirements do not apply forswaps between affiliates provided the followingconditions are met:

• affiliates have common ownership: -- (i) onecounterparty, directly or indirectly, holds amajority ownership interest in the othercounterparty, or (ii) a third party, directly orindirectly, holds a majority ownershipinterest in both affiliate counterparties;

• affiliates report for each swap that they areeligible to elect the inter-affiliate exception;

• annual reporting of how each affiliate meetsits financial obligations associated withentering into non-cleared swaps;

• swap documentation;

• centralized risk management; and

• external swaps of affiliates must either (i) becleared in the US or pursuant to comparablehome country regulations, or (ii) be exemptfrom clearing under the Dodd-Frank Act or acomparable foreign jurisdiction exception.

In the case of a ’34 Act filer, the use of thisexception must be reviewed and approved byan appropriate committee of the company’sboard.



In recognition that most jurisdictions have notfully implemented clearing regimes, the finalrule established an alternative complianceregime under which parties can claim theexemption during a transitional period until 11March 2014 (such date extended to 31December 2015 pursuant to CFTC no actionrelief). The alternative regime is subject to anumber of conditions which vary depending onthe jurisdiction in which a non-US counterpartyis located.

FX exclusion

In November 2012, the US Secretary of theTreasury exempted FX swaps from thedefinition of "swap." As a consequence, foreignexchange swaps and foreign exchangederivatives which are physically settled areexcluded from the clearing requirements.

Trade Execution MiFID II

All sufficiently liquid derivative trades that aresubject to the clearing obligation under EMIRwill need to be traded on a regulated tradingvenue (regulated market, Multilateral TradingFacility (MTF), OTF or third country (i.e. non-EU) trading venue).

This requirement is expected to apply to bothFCs and NFC+s.

Within 6 months of the European Commissionadopting a clearing obligation in relation to aclass of derivatives, ESMA will be required tolaunch a consultation to determine whethersuch derivatives should be subject to thetrading obligation.

Under MiFID II, there will also be new pre- andpost- transparency requirements.

ESMA will also publish and maintain a list ofderivatives which need to be traded on aregulated venue.

MiFID II was published in the Official Journalon 12 June 2014 and came into force on 2July 2014. However, the provisions of MiFID IIwill not be effective until 3 January 2017.

Following its discussion and consultationpapers published in May 2014, in December2014 ESMA published final technical advice

Dodd-Frank Section 723(a)(8)Commodity Exchange Act (7 USC 2(h)(8))

17 CFR Parts 1, 16, 37, 38 and 40

Swaps that are required to be cleared must betraded on a designated contract market (DCM)or a swap execution facility (SEF), except whereno DCM or SEF makes the swap available fortrading.

Swaps traded on SEFs are divided into twodifferent categories for the purposes of the tradeexecution regime. "Required transactions" arethose swaps that are subject to the tradeexecution requirement. "Permittedtransactions," are those transactions that do notinvolve swaps subject to the trade executionrequirement. Block trades, illiquid swaps andbespoke swaps generally fall into the "permittedtransactions" category.

A DCM or SEF may make a swap "available totrade" by first making a determination based onseveral factors, including that there are readyand willing buyers and sellers, the tradingvolume, the bid/ask spread and the frequencyor size of transactions. If the DCM or SEFdetermines that the swap is available to trade, itmay submit this determination to the CFTC.The CFTC may provide for a 30-day publiccomment period before determining that a swapis available to trade.

In February 2014, certain classes of USD, EURand GBP-denominated fixed-to-floating interest



and a consultation paper (and draft regulatorytechnical standards) in relation to MiFID II.The consultation paper covers issues such asthe obligation to trade derivatives on aregulated trading venue and increased tradetransparency for non-equity instrumentsincluding derivatives. In February 2015, ESMApublished a further addendum consultationpaper containing technical information ontransparency issues for certain non-equityinstruments (FX derivatives, credit derivatives,other derivatives and contracts for difference)

Member States will need to transpose anydelegated acts by 3 July 2016 and MiFIDII/MiFIR will apply from 3 January 2017.

rate swaps along with certain classes of index-based untranched credit default swaps weredeclared available to trade. However, pursuantto CFTC no-action relief, swaps betweeneligible affiliate counterparties that are subjectto a trade execution requirement are notrequired to be cleared until 1 January 2016.

A "swap execution facility" is defined as atrading system or platform in which multipleparticipants have the ability to execute or tradeswaps by accepting bids and offers made bymultiple participants in the facility or system,through any means of interstate commerce,including any trading facility, that:

• facilitates the execution of swaps betweenpersons; and

• is not a designated contract market.

• DCM rules in force 20 August 2012 (17 CFRPart 38)

SEF rules (17 CFR Part 37)

• Swaps subject to a clearing requirementmust be traded on an SEF either through anOrder Book or through a Request for QuoteSystem (RFQ) that operates in conjunctionwith an Order Book.

• Swap transactions are subject to theexecution requirement upon the later of (a)the date the clearing requirement for suchswap goes into effect, or (b) thirty days afterthe determination that such swap isavailable to trade is deemed approved orcertified pursuant to CFTC rules.

• An Order Book is defined as an electronictrading facility, a trading facility (each asdefined in the Dodd-Frank Act) or a tradingsystem or platform in which all marketparticipants in the trading system or platformhave the ability to enter multiple bids andoffers, observe or receive bids and offersentered by other market participants, andtransact on such bids and offers.

• The RFQ system is a trading system orplatform in which a market participanttransmits a request for a quote to buy or sella specific instrument to no less than acertain number of participants in the tradingsystem or platform, to which all suchparticipants may respond.



• An SEF must provide any eligible contractparticipant and any independent softwarevendor with impartial access to its market(s)and market services, including any indicativequote screens or similar pricing datadisplays.

• A minimum pause of 15 seconds betweenentry of two potentially matching customer-broker swap orders or two potentiallymatching customer-customer swap orderson SEFs’ Order Book (such that one side ofthe potential transaction is disclosed andmade available to other market participantsbefore the second side of the potentialtransaction is submitted for execution). Thetime delay is not applicable to tradesexecuted through an RFQ system.

• SEFs must provide that market participantstransmit an RFQ to at least three potentialcounterparties in the trading system orplatform, subject to a phase-in complianceperiod:

• from 5 August 2013 to 2 October2014, market participants could onlytransmit RFQs to two participants;

• the three-quote requirement cameinto effect on 3 October 2014.

• SEFs may offer any method of execution forpermitted transactions as long as an OrderBook is among the offered methods.

• SEFs are not required to offer functionalityfor indicative quotes.

• SEFs may use proprietary data or personalinformation for business or marketingpurposes only if the person from whom theycollect or receive such information consentsto such use, and SEFs may not conditionaccess to their facilities based upon suchconsent.

Trade reporting

Pursuant to US trade reporting rules, SEFs mustreport creation data to a registered swap datarepository for any swaps executed on orpursuant to the rules of an SEF.

Continuation data reporting for uncleared swapsexecuted on or pursuant to the rules of an SEFis the obligation of the designated reportingcounterparty, not the SEF.



Derivatives ClearingOrganizations / CCPs

EMIR Articles 14 - 50

CCPs need to be authorized by the relevantcompetent authority and comply with neworganization, prudential, conduct of businessand minimum capital requirements.

Non-EEA CCPs may be authorized by ESMAto provide clearing services in the EEA,provided that the CCP is subject to equivalentsupervision and enforcement regime in therelevant non-EEA state. To date, theCommission has established implementingacts in respect of Australia, Hong Kong,Singapore and Japan. Accordingly, CCPsfrom those jurisdictions are able to obtainrecognition under EMIR. CCPs from otherjurisdictions are not yet able to obtainrecognition under EMIR, but are currently ableto continue providing any services they havebeen providing into the EU on the basis oftransitional provisions under EMIR.

CCPs are subject to:

• detailed organizational requirements,including requirements as to thecomposition and structure of the board andsenior management arrangements andinternal control structures, such as risk,compliance, internal audit and technologymanagement;

• extensive and prescriptive BusinessContinuity Planning / Disaster Recoveryrequirements (including, for example, arequirement for the CCP to ensurerecovery of critical functions within 2hours);

• prescriptive financial resource and liquidityrequirements. This includes a base capitalrequirement of EUR 7.5m, together withrisk based capital calculated on the basisof the approaches that are derived fromthose set out for banks in the CapitalRequirements Directive;

• a requirement to offer clearing membersthe ability to segregate client accounts withthe CCP either at an omnibus or individualclient level;

• a requirement for CCPs contractually tocommit themselves to transfer assets andpositions of a defaulting member for theaccount of clients to another clearingmember nominated by all such clients, ontheir request and without the consent of

Dodd-Frank Section 725Commodity Exchange Act (7 USC 7a–1)

DCOs are subject to registration, financial andrisk management requirements.

Final Rule17 CFR Parts 1, 21, 39, and 140

DCOs are subject to registration, financial andrisk management requirements, including:

• financial resources must be able to coverDCOs operating costs for at least one year;

• DCOs must perform monthly stress tests toassess how much financial resources theyneed to meet their statutory requirements;

• each DCO must "make a reasonablecalculation of its projected operating costsover a 12 month period in order to determinethe amount needed to meet" its statutoryrequirements;

• DCOs cannot "set a minimum capitalrequirement of more than $50 million for anyperson that seeks to become a clearingmember in order to clear swaps";

• DCOs must segregate, set aside or hold in aseparate account customer funds andassets; and

• in order for a DCO or its clearing membersto commingle customer positions in swaps,options and futures, the DCO must file rulesfor approval with the CFTC.

Mutual Recognition of CCPs and DCOs

• In July 2013, Chairman Gary Gensler, thethen Chairman of the CFTC, and EuropeanCommissioner Michel Barnier agreed toallow DCOs and CCPs to clearswaps/derivatives for the clearing membersoutside of the jurisdiction of their registrationuntil the EU could reach its equivalencedecisions and the CFTC could make itssubstituted compliance determinations.

• In the meanwhile, the CFTC has providedtime-limited no-action relief to two EU CCPsfrom DCO registration requirements untilearlier of 31 December 2013 or the DCCbecoming a registered relevant CCP (thisrelief was extended to 31 December 2014for LCH.Clearnet Ltd. and to 30 September2015 for Eurex Clearing AG).

Neither the EU nor the CFTC has madeequivalence decisions or substitutedcompliance determinations.



the defaulting clearing member; and

• prescriptive requirements as to structureand operation of the default arrangementsto be applied by CCPs, including:

• requirements for a minimum size of defaultfund; and

• an obligation on the CCPs to use their owndedicated resources before seekingrecourse to the default fund contributionsof non-defaulting members.

As indicated above, to date, 16 CCPs havebeen authorised under EMIR.

Trade Reporting EMIR Article 9

EU derivatives contracts (including both listedand OTC and whether or not subject to theclearing obligation) must be reported to atrade repository (or, if unavailable, to ESMA)by no later than the next working day.

Counterparties are responsible for ensuringthat the details of any OTC derivativetransactions entered into (includingmodifications and amendments) are reportedwithout duplication, although the reportingobligation can be delegated by prioragreement to one counterparty or a thirdparty.

The details to be reported to trade repositoriesare set out in the delegated regulations andinclude the parties to the contract and themain commercial details of the transaction.

Counterparties should keep a record of anyderivatives contracts they enter into and anymodifications for at least 5 years after thetermination of the contract.

Trade repositories must be registered andmonitored by ESMA and are subject tooperational requirements.

ESMA initially approved the registration of thefollowing 4 trade repositories:

• DTCC Derivatives Repository Ltd. (DDRL),based in the United Kingdom

• Krajowy Depozyt Papierów WartosciowychS.A. (KDPW), based in Poland

• Regis-TR S.A., based in Luxembourg

Dodd-Frank Section 727Commodity Exchange Act (7 USC 2(a)(13)

CFTC is authorized to require real-time publicreporting for cleared and uncleared swaps, withappropriate time delays for reporting largenotional swap transactions (block trades).

Final Rule17 CFR Parts 43 and 45

• All primary economic terms data for theswaps must be reported;

• reporting must be done "as soon astechnologically practicable after execution"but no later than 1 hour after executionduring the first year of compliance and 30minutes after execution beginning with thesecond year of compliance;

• however, if the non-reporting counterparty isneither a swap dealer nor an MSP and is nota financial entity as defined in the CEA andverification of economic terms does notoccur electronically, then swaps must bereported as "soon as technologicallypracticable after execution" but no later thanwithin 24 business hours after executionduring the first year of compliance, 12business hours after execution during thesecond year of compliance and 30 minutesafter execution beginning with the third yearof compliance;

• requirement of continuation data reporting toensure that all reported data remainsaccurate and up-to-date;

• each swap is to be recorded using a uniqueswap identifier and each counterparty is tobe identified using a single legal entityidentifier;



• UnaVista Ltd, (the London StockExchange's global hosted platform basedin the United Kingdom)

The registrations took effect on 14 November2013 and the reporting obligation took effecton 12 February 2014.

On 28 November 2013 ESMA also approvedthe registration of:

• ICE Trade Vault Europe Ltd. (ICE TVEL),based in the United Kingdom; and

• CME Trade Repository Ltd. (CME TR),based in the United Kingdom.

The registered trade repositories cover allderivative asset classes – commodities, credit,foreign exchange, equity, interest rates andothers – irrespective of whether the contractsare traded on or off exchange.

Backloading

As of 12 August 2014, all FCs and NFC+sneed to report data on collateral andvaluations.

When the reporting obligation came into forceon 12 February 2014 any transactions thatwere outstanding on 16 August 2012 and stilloutstanding on 12 February 2014 wererequired to be reported within 90 days (13May 2014). Any transactions that wereentered into on or after 16 August 2012 butthat are no longer outstanding must bereported within 3 years.

MiFID II

MiFID II extends its pre- and post-tradereporting requirements beyond equities tocover equity-like instruments, bonds andderivatives. Trading venues will be required tomake pre- and post-trade reporting dataavailable on a reasonable commercial basis.All firms will have to report trades throughApproved Publication Arrangements (APAs).MiFiD II envisages that a consolidated tapewill be introduced for all equity and equity-liketrades in the EU; in the longer term, it isintended to create a similar tape for non-equities.

In the long term it is hoped that the reportingrequirements under EMIR and MiFID II will bealigned.

• swap products are to be identified usingunique product identifiers and a productclassification system; and

• swap reporting is to a registered swap datarepository (SDR) unless no SDR makes theswap available for reporting, in which caseswaps are to be reported directly to theCFTC.

SBSR Registration and Reporting

On 14 January 2015, the SEC adopted two newsets of rules that require security-based swapdata repositories (SBSRs) to register with theSEC and prescribed reporting and publicdissemination requirements for security-basedswap transaction data. On the same date, theSEC also proposed certain additional rules, ruleamendments and guidance related to thereporting and public dissemination of security-based swap transaction data (collectively,Regulation SBSR).

As part of the newly proposed rules, the SEChas proposed a new compliance schedule withrespect to reporting of a particular asset classsuch that any person who has an obligation toreport must commence reporting six monthsafter the first registered SBSR commencesoperations and accepts reports of security-based swaps in that particular class(Compliance Date 1). The proposedcompliance schedule also requires historicaldata to be reported, to the extent available, byCompliance Date 1.

The public dissemination requirements ofRegulation SBSR go into effect 3 months afterCompliance Date 1 for that particular assetclass.

Block trades17 CFR Part 43

CFTC has established initial appropriateminimum block sizes for publicly reportableswap transactions based on categories withinthese swap classes:

• Interest rate asset class

• Credit asset class

• Foreign exchange asset class

• Other commodity asset class

Block sizes are calculated using formulas basedon 50 per cent, 67 per cent or 75 per cent of



aggregate notional value of a "trimmed data set"of large notional transactions.

CFTC rules provide initial block sizes prior tothe effective date of a CFTC determination toestablish an applicable post-initial block size fora swap category.

CFTC rules also provide for time delays forpublic dissemination for certain block trades.These time delays vary depending on theparties involved. Currently, "year 2" time delaysare in effect, and unless stated otherwise, thesetime delays will remain unchanged goingforward. Where an SD/MSP counterparty is theregulatory reporting party, the time delays forpubic dissemination is 15 minutes for swapsexecuted on a SEF or a DCM; 15 minutes foroff-facility swaps subject to mandatory clearing,30 minutes for credit, equity, foreign exchangeand interest rate off-facility swaps not subject tomandatory clearing, and 2 hours for all other off-facility swaps not subject to mandatory clearing.

Where a non-SD/MSP counterparty is theregulatory reporting party, the time delays forpublic dissemination is 15 minutes for swapsexecuted on a SEF or DCM, 2 hours for off-facility swaps subject to mandatory clearing (thetime delay will be reduced to 1 hour startingyear 3), and 36 business hours for off-facilityswaps not subject to mandatory clearing (thetime delay will be reduced to 24 business hoursstarting year 3).

Determining the reporting counterparty

17 CFR Part 45

The identity of the reporting counterparty isdetermined as follows:

• if only one counterparty is a swap dealer,then the swap dealer is the reportingcounterparty;

• if neither counterparty is a swap dealer butonly one counterparty is an MSP, then theMSP is the reporting counterparty;

• if neither counterparty is a swap dealer or anMSP but one counterparty is a financialentity as defined in Section 2(h)(7)(C) of theCEA, then the financial entity is the reportingcounterparty;



• if both counterparties have the same status,then they decide amongst themselves whowill report; and

• notwithstanding these rules, if neither partyis a swap dealer or an MSP and only oneparty is a US person, then the US personreports.

Legacy swaps

17 CFR Part 46

Legacy swaps fall into one of two categories:

• pre-enactment swaps - any swap enteredinto prior to 21 July 2010, the terms of whichhave not expired as of 21 July 2010; and

• transition swaps - any swap entered into onor after 21 July 2010 and prior to theapplicable compliance date (betweenOctober 2012 and April 2013, depending onthe type of swap and counterparty).

The following reporting rules apply to legacyswaps:

• for legacy swaps in existence on or after 25April 2011, the reporting counterparty shouldreport its: (i) legal entity identifier; (ii)minimum primary economic terms; and (iii)its internal identifiers to an SDR;

• for each uncleared legacy swap in existenceon or after 25 April 2011, the reportingcounterparty must report swap continuationdata to an SDR throughout the life of theswap;

• for each pre-enactment swap that expired orwas terminated prior to 25 April 2011, thereporting counterparty must report on thecompliance date such information relating tothe transaction as was in its possession onor after 14 October 2010; and

• for each transition swap that expired or wasterminated prior to 25 April 2011, thereporting counterparty must report to anSDR on the compliance date suchinformation relating to the transaction aswas in its possession on or after 17December 2010.



Record keeping EU Directives, including MiFID, set out a widerange of record keeping requirementsapplicable to different types of regulatedactivities that have been transposed intonational regulatory provisions.

These requirements include that firms shouldretain all records for at least 5 years (includingthe relevant data relating to all transactions infinancial instruments) and that records of therights and obligations of parties (i.e. contractterms, or terms of business) should beretained for at least the duration of therelationship with the client. The rules alsospecify how records should be held.

Article 9(2) of EMIR requires thatcounterparties keep a record of any derivativecontract or modification for at least five yearsfollowing the termination of that contract.

MiFID II includes some additional recordkeeping requirements, for example, withregard to the recording of telephoneconversations and electronic communications.

In its December 2014 technical advice onMiFID II, ESMA stated that investment firmsshould have arrangements in place to ensurecompliance with requirements to recordtelephone conversations and electroniccommunications with the firms' managementbodies having effective oversight and controlover the policies and procedures relating tosuch recordings.

Under EMIR, clearing houses are required tocomply with more detailed record keepingrequirements. For example, clearing housesare required to maintain transaction records,position records and general business recordsin accordance with detailed provisions set outin the technical standards underpinning EMIR,for a period of at least 10 years.

17 CFR Part 45

Various swap participants are required to keeprecords of their swaps.

End users are required to "keep full, completeand systematic records, together with allpertinent data and memoranda, with respect toeach swap in which they are a counterparty,"including records proving that their swaps areexempt from mandatory clearing under Section2(h)(7) of the CEA.

All participants must retain records through thelife of the swap and for a period of five yearsafter the swap is terminated.

End-users may keep records in electronic orpaper form, as long as the information isretrievable and reportable.

Records kept by end-users should beretrievable within five business days, whilerecords kept by other participants should bereadily accessible via real-time electronicaccess throughout the life of the swap plus twoyears, and within three business daysthereafter.

Records must be open to inspection by theDepartment of Justice, the CFTC, the SEC andrepresentatives of prudential regulators.

Each counterparty to a legacy swap inexistence on or after 25 April 2011 must keeprecords of certain primary economic terms aswell as copies of master agreements,confirmations and credit support agreements,and modifications thereto, that it has in itspossession on or after that date.

If a swap was: (i) entered into prior to 21 July2010; (ii) was unexpired as of 21 July 2010; and(iii) expired prior to 25 April 2011; then eachcounterparty to that swap must maintain recordsthat it had possession of on or after 14 October2010. The counterparty may choose to keep therecords in the format they existed in on or after14 October 2010, or in any other format.

If a swap was entered into on or after 21 July2010 but expired prior to 25 April 2011, eachcounterparty must maintain records about theterms of the transaction that it had possessionof on or after 17 December 2010, in the formatin which the information existed on that day orin any other format.



Risk mitigation techniquesfor uncleared trades

EMIR Article 11

Under EMIR, in respect of uncleared trades,counterparties need to have appropriateprocedures in place to monitor and mitigateoperational and counterparty credit risk,including timely confirmation of the terms ofOTC derivative trades, portfolio reconciliation,portfolio compression and dispute resolution.FCs and NFC+s are also obliged to engage intimely, accurate and appropriately segregatedexchange of collateral and conduct a dailymark-to-market (or, if market conditions do notallow, marking to model). In addition, FCs arerequired to hold appropriate and proportionatecapital to manage the risks not covered byappropriate exchange of collateral.

The following is a summary of some of the keyrequirements.

Timely confirmation of unclearedderivative transactions (in force from 15March 2013)

Each counterparty to uncleared OTCderivative transactions must confirm trades assoon as possible and at the latest:

• for transactions between FCs and NFC+sand which are: (i) credit default swaps andinterest rate swaps, on a T+2 basis until28 February 2014 and thereafter on a T+1basis; and (ii) equity swaps, foreignexchange, commodities and all otherderivatives, on a T+2 basis until31 August 2014 and thereafter on a T+1basis; and

• for transactions with a NFC- and whichare: (i) credit default swaps and interestrate swaps, on a T+3 basis until31 August 2014, and thereafter on a T+2basis; and (ii) equity swaps, foreignexchange, commodities and all otherderivatives, on a T+4 basis until31 August 2014, and thereafter on a T+2basis.

If a trade is concluded after 16:00 local time,confirmation must take place at the latest onebusiness day following the deadline set out inthe relevant category above. In addition, FCsmust report on a monthly basis to thecompetent authority the number ofunconfirmed OTC derivative trades in theabove categories that have been outstandingfor more than 5 business days. Theconfirmation requirements will apply to all non-cleared trades.

17 CFR Part 23

The risk mitigation techniques apply to swapswhere one or more of the counterparties is aswap dealer or MSP.

Timely confirmations of uncleared off-facilityswap transactions

Each swap dealer and MSP entering into aswap transaction must execute a confirmation(and send an acknowledgment, if applicable) assoon as technologically practicable and at thelatest:

• Confirmation for credit swaps or interest rateswaps with swap dealer or MSP: T+1.

• Confirmation for equity swaps, foreignexchange swaps, or other commodity swapswith swap dealer or MSP:

(i) T+2 until 31 August 2014; and(ii) T+1 beginning 1 September 2014.

• Acknowledgment for credit swaps or interestrate swaps with a non-swap dealer and non-MSP: T+1.

• Acknowledgment for equity swaps, foreignexchange swaps, or other commodity swapswith non-swap dealer and non-MSP:


• Confirmation for credit swaps or interest rateswaps with financial entity:

(i) T+2 until 28 February 2014; and(ii) T+1 beginning 1 March 2014.

• Confirmation for equity swaps, foreignexchange swaps or other commodity swapswith financial entity:


• Confirmation for credit swaps or interest rateswaps with non-swap dealer that is not anMSP or financial entity:


• Confirmation for equity swaps, foreignexchange swaps, or other commodity swapswith non-swap dealer that is not an MSP orfinancial entity:




The International Swaps and DerivativesAssociation, Inc. (ISDA) has issued a form ofTimely Confirmation Amendment Agreementas a form of agreement that marketparticipants can use as part of their tool kit forcompliance with the obligation imposed byEMIR to provide timely confirmation of theterms of an uncleared OTC derivativecontract.

Mark-to-market (in force from 15 March2013)

FCs and NFC+s need to mark-to-market on adaily basis (or, if market conditions do notallow, marking to model) and when the traderepositories are established, report these tothe trade repository daily.

Portfolio reconciliation and portfoliocompression (in force from 15 September2013)

Counterparties must agree in writing the termsof portfolio reconciliation for OTC derivativestrades, which must include reconciliation ofkey trade terms and any mark-to marketvaluations (see above). The frequency withwhich portfolio reconciliation must beperformed depends on whether the entity is aFC, NFC+ or NFC- and the number ofoutstanding OTC derivative contracts betweenthe counterparties.Portfolio compression applies wherecounterparties have 500 or more OTCderivative contracts outstanding with eachother.

Dispute resolution (in force from 15September 2013)

Counterparties must have in place agreeddetailed procedures and processes in placecovering the identification, recording andmonitoring of disputes which relate to therecognition or valuation of a transaction andany exchange of collateral. Disputes must beresolved in a timely manner and theprocedures must include a specific process forresolution of any dispute that is not resolvedwithin 5 business days.

ISDA has published the 2013 EMIR PortfolioReconciliation, Dispute Resolution andDisclosure Protocol to aid compliance withthese requirements by allowing a counterpartyto adhere to a single arrangement which willaddress these requirements with all other

An acknowledgment is a written or electronicrecord of all of the terms of a swap. Anacknowledgment is not legally binding until it issigned or otherwise executed by a receivingcounterparty, upon which it becomes aconfirmation.

Prior to execution, the prospective counterpartymay ask the swap dealer or MSP for a draftacknowledgment specifying all terms of theswap transaction other than the applicablepricing and other relevant terms that are to beexpressly agreed at execution.

Mark-to-market

For cleared swaps, each swap dealer or MSPmust notify its counterparties of their right toreceive, upon request, the daily mark from theappropriate derivatives clearing organization.

For uncleared swaps, each swap dealer or MSPmust provide its counterparties with a dailymark, which shall be the mid-market mark of theswap. The mid-market mark of the swap shallnot include amounts for profit, credit reserve,hedging, funding, liquidity, or any other costs oradjustments. The daily mark shall be providedto the counterparty during the term of the swapas of the close of business or such other timeas the parties agree in writing.

Portfolio reconciliation

For swaps where both counterparties are swapdealers and/or MSPs:

• terms to be agreed upon in writing;

• may be performed on a bilateral basis or bya qualified third party;

• portfolio to be reconciled no less frequentlythan: (a) each business day for eachportfolio with ≥500 swaps; (b) weekly for each portfolio with >50 but <500 swaps onany business day during the week; (c)quarterly for each portfolio with ≤50 swaps during the calendar quarter;

• each swap dealer and MSP must resolveimmediately any discrepancy in a materialterm of a swap identified as part of aportfolio reconciliation or otherwise; and

• each swap dealer and MSP must havepolicies reasonably designed to resolve anydiscrepancy in a valuation identified as partof a portfolio reconciliation or otherwise assoon as possible, but in any event within 5business days.



counterparties. ISDA has also published abilateral standard amendment agreement,which is based on this Protocol and may be auseful tool for those counterparties who wishto amend their documentation on a bilateralbasis.

The FCA has said that it expects firms whichwere initially unable to comply with theportfolio reconciliation, dispute resolution andportfolio compression requirements foruncleared trades to have completed andimplemented their plans to achievecompliance by 30 April 2014 and that firmsshould be able to demonstrate complianceafter this date.

Margin requirements

Please see below.

For swaps with non-swap dealers and non-MSPs:

• terms to be agreed upon in writing, includingagreement on the selection of any third-party service provider;

• may be performed on a bilateral basis or byone or more third parties selected bycounterparties;

• portfolio to be reconciled no less frequentlythan: (a) quarterly for each portfoliowith >100 swaps at any time during calendarquarter; (b) annually for each portfolio with≤100 swaps at any time during calendar year; and

• each swap dealer and MSP must havewritten procedures reasonably designed toresolve any discrepancies in the materialterms or valuation of each swap identified aspart of a portfolio reconciliation (differencebetween lower and higher valuations of≤10% of the higher valuation need not be deemed a discrepancy).

Valuation disputes in excess of $20m to bereported to regulators if not resolved within 3business days (for swaps with swap dealersand MSPs) or 5 business days (for all otherswaps).

Portfolio compression for uncleared swaps

Each swap dealer and MSP must have policiesfor: (i) terminating each fully offsetting swap withanother swap dealer or MSP in a timely fashion,when appropriate, (ii) periodically engaging inbilateral portfolio compression exercises, whenappropriate, with other swap dealers and MSPs,and (iii) engaging in multilateral portfoliocompression exercises, when appropriate, withother swap dealers and MSPs.

Each swap dealer and MSP must have policiesfor terminating fully offsetting swaps and forengaging in portfolio compression exerciseswith respect to swaps with non-swap dealersand non-MSPs, to the extent requested by anysuch counterparty.



Margin requirements foruncleared trades

EMIR Article 11 (3)

FCs and NFC+s will be subject to initial andvariation margin requirements for unclearedtrades.

On 18 March 2015 the Basel Committee onBanking Supervision (BCBS) and theInternational Organization of SecuritiesCommissions (IOSCO) working grouppublished revisions to their joint report(published on 2 September 2013) on commoninternational standards. The main changewas to delay the implementation date of themargin requirements by 9 months, to 1September 2016. On 10 June 2015 the ESAslaunched a second consultation (following thefirst consultation in April 2014) on the draftregulatory technical standards which providemore detail on the margin requirements forOTC derivatives that are not cleared by aCCP.

Proposals include that the initial marginrequirements should be phased in over a 4year period from 1 September 2016, startingwith the largest derivative market participants.At the end of the phase-in period from 1September 2020, the initial marginrequirements will apply to uncleared derivativetransactions where both counterparties haveor belong to a group, each of which has anaggregate average notional amount ofuncleared derivatives of more than EUR 8billion. There will be a minimum transferamount of EUR 500,000.

FCs and NFC+s do not need to exchangeinitial margin or variation on margin wheretheir counterparty is an NFC-.

Where the total initial margin for unclearedderivatives between the counterparties atgroup level is equal to or lower than EUR 50million, no initial margin needs to beexchanged.

Counterparties will also need to exchangevariation margin on a daily basis in respect ofnew contracts entered into:

• from 1 September 2016 (where bothcounterparties have, or belong togroups, each of which has anaggregate average notional amountof non-centrally cleared derivativesabove EUR 3 trillion); and

• from 1 March 2017 (for all othercounterparties).

Dodd-Frank Sections 731 and 764

Requirements created by CFTC, SEC andprudential bank regulators.

Pursuant to amendments to the Dodd-Frank Actsigned into law on 28 March 2015, marginrequirements will not apply to (a) non-financialentities entering into swaps to hedge andmitigate commercial risk, (b) affiliates acting onbehalf of such an entity that use swaps tohedge or mitigate the commercial risk of suchentity or another affiliate that is not a financialentity, and (c) cooperatives that meet certainregulatory parameters.

Proposed Rule 17 CFR Part 23

In September 2014, the CFTC and theprudential regulators re-proposed theirrespective margin requirements for unclearedswaps entered into by swap dealers or MSPs.The re-proposed rules closely follow BCBS-IOSCO’s 2 September 2013 report.

The amount of margin required under theproposed rules would vary based on the relativerisk of the counterparty and of the non-clearedswap. . The compliance date for variationmargin requirements is proposed to beDecember 1, 2015. The compliance dates forinitial margin requirements will be phased infrom December 1, 2015 to December 1, 2019,depending on the average daily aggregatenotional amounts of the counterparties and theiraffiliates. The CFTC and the prudentialregulators are likely to re-propose the rules inlight of recent amendments to the Dodd-FrankAct.

Trades between swap dealers/MSPs and otherswap dealers/MSPs: swap dealer/MSP mustpost and collect initial margin and variationmargin for each trade.

Trades between swap dealers/MSPs andfinancial end users with a material swapsexposure: swap dealer/MSP must post andcollect initial and variation margin for eachtrade. Trades between swap dealers/MSPs andfinancial end users without a material swapsexposure: swap dealer/MSP posts and collectsinitial margin as it determines to be appropriateand is required to post and collect variationmargin.

Material swaps exposure is defined to meanthat the entity and its affiliates have an averagedaily aggregate notional amount of non-cleared



Eligible collateral broadly includes:

• cash;

• allocated gold;

• debt securities issued by governmententities, multilateral developmentbanks, credit institutions orinvestment firms;

• corporate bonds;

• the most senior tranche of asecuritization (provided it is not a re-securitization); and

• equities.

In addition, there are collateral eligibilitycriteria and concentration limits.

Counterparties also need to put in placerobust operational requirements, includingclear senior management reporting, anescalation procedure and documentationrequirements.

swaps, non-cleared security-based swaps,foreign exchange forwards and foreignexchange swaps with all counterparties forJune, July and August of the previous year thatexceeds $3 billion, where such amount iscalculated only for business days.

Under proposed rules, swap dealers/MSPs mayadopt a maximum initial margin thresholdamount of $65 million, below which the swapdealer/MSP need not collect or post initialmargin from or to other swap dealers/MSPs andfinancial end users with material swapsexposure. A minimum transfer amount of up to$650,000 is proposed.

Position limits MiFID II

MiFID II proposes transparent non-discriminatory position limits in relation tocommodity derivatives that trading venuesmust apply.

MiFID II empowers ESMA to co-ordinatemeasures taken by EU competent authoritiesto manage positions, including the setting ofposition limits and ESMA will have specificpowers when certain criteria are met and candemand information on the site and purposeof a position or exposure entered into via aderivative and request that steps be taken toreduce the site of the exposure or position.

Position limits will not apply to positions heldby or on behalf of a non-financial entity andwhich are objectively measurable as reducingrisks directly relating to the commercial activityof that non-financial entity.

The consultation paper and discussion paperissued by ESMA in December 2014 containfurther commentary on the requirements forposition limits and position reporting in relationto commodity derivatives, together with adiscussion of the scope of the application ofMiFiD II to such derivatives.

Dodd-Frank Section 737

In November 2011, the CFTC issued a final ruleon position limits. On 28 September 2012, a USfederal district judge vacated the final rule.

Following the court decision, the CFTC issued anew proposed rule in November 2013. Thelatest public comment period ended 22 January2015. The CFTC is expected to approve finalrules after reviewing the comments.

Proposed Rule17 CFR Part 150

• 28 Core Referenced Futures Contracts:

• 9 "legacy" agricultural contracts

• 10 "non-legacy" agricultural contracts

• 4 energy contracts

• 5 metal contracts

Two types of speculative limits: spot-monthposition limits and non-spot-month positionlimits.

Spot-month position limits apply in the periodimmediately before delivery obligations areincurred for physical delivery contracts or theperiod immediately before contracts areliquidated by the clearinghouse based on areference price for cash-settled contracts.



The existing exemptions for commodities firmshave largely been lifted, thereby bringingmost, if not all, commodities trades under thescope of MiFID II.

MiFID II should apply from 3 January 2017.

Spot-month period is specific to eachcommodity contract, need not correspond to amonth-long period, and may extend through theperiod when the contract is no longer listed fortrade or available for transfer.

Generally, spot-month position limits forReferenced Contracts will be set at 25% ofestimated deliverable supply.

Example: New York Mercantile Exchange LightSweet Crude Oil spot-month limit: 3,000.

Aggregation is generally required if one entityowns 10% or more of another entity. However,any person with an ownership or equity interestin an entity (financial or non-financial) ofbetween 10% and 50% may disaggregate theowned entity’s positions upon demonstratingindependence of trading.

Disaggregation is allowed if one entity ownsmore than 50% of another entity only upon theapproval of an application to the CFTC.

There is an exemption for bona fide hedgingtransactions, which mean any of the following:

• sales or purchases of Referenced Contractsthat do not exceed a certain quantity;

• offsetting sales or purchases of ReferencedContracts that do not exceed a certainquantity;

• purchases or sales by an agent who doesnot own or has not contracted to sell orpurchase the offsetting cash commodity at afixed price;

• anticipated royalty hedges;

• anticipated service hedges;

• cross-commodity hedges;

• pass-through swaps; or

• pass-through swap offsets.



Extraterritorial Issues EMIR Articles 4 and 11

Under EMIR, the obligation to clear OTCderivative transactions applies to OTCderivative transactions between a FC or NFC+in the EU and a non-EU entity if the non-EUentity would be subject to the clearingobligation under EMIR if it were establishedwithin the EU. The clearing obligation andrequirement to put in place risk mitigationtechniques for uncleared trades under EMIRalso applies to OTC derivative trades betweentwo non-EU counterparties where both non-EU counterparties would be subject to theclearing obligation if they were established inthe EU and the contract has a "direct,substantial and foreseeable effect or wheresuch obligation is necessary or appropriate toprevent the evasion of any provisions ofEMIR".

Under Commission Delegated Regulation No285/2014 (which applied from 10 October2014), an OTC derivative contract shall beconsidered as having a direct, substantial andforeseeable effect within the EU where:

• the two non-EU entities that would beFCs if established in the EU executetransactions via their EU branches;or

• one of the two non-EU entitiesbenefits from a guarantee from anEU FC which meets certainconditions.

Where one or more counterparties is locatedin a third country that has been declared to beequivalent by the European Commissionadopting an implementing act, EMIR can bedisapplied if the third country frameworkallows reaching an outcome equivalent to thatof EMIR and the counterparty will be deemedto comply with EMIR.

On 30 October 2014 the EuropeanCommission announced the first equivalencedecisions regarding the regulatory regimes ofCCPs in Australia, Hong Kong, Japan andSingapore and subsequently in April 2015 10CCPs from those jurisdictions wererecognised by ESMA as being qualifyingCCPs.

On 26 July 2013, the CFTC issued finalinterpretative guidance concerning the cross-border application of certain swap provisions ofthe Commodity Exchange Act.

Definition of "US person"

Per the interpretive guidance, "US person" isany person that is:

(i) any natural person who is a resident of theUnited States;

(ii) any estate of a decedent who was a residentof the United States at the time of death;

(iii) any corporation, partnership, limited liabilitycompany, business or other trust, association,joint-stock company, fund or any form ofenterprise similar to any of the foregoing (otherthan an entity described in prongs (iv) or (v),below) (a ‘legal entity), in each case that isorganized or incorporated under the laws of astate or other jurisdiction in the United States orhaving its principal place of business in theUnited States;

(iv) any pension plan for the employees, officersor principals of a legal entity described in prong(iii), unless the pension plan is primarily forforeign employees of such entity;

(v) any trust governed by the laws of a state orother jurisdiction in the United States if a courtwithin the United States is able to exerciseprimary supervision over the administration ofthe trust;

(vi) any commodity pool, pooled account,investment fund, or other collective investmentvehicle that is not described in prong (iii) andthat is majority-owned by one or more personsdescribed in any of the above prongs, exceptany commodity pool, pooled account,investment fund, or other collective investmentvehicle that is publicly offered only to non-USpersons and not offered to US persons;

(vii) any legal entity (other than a limited liabilitycompany, limited liability partnership or similarentity where all of the owners of the entity havelimited liability) that is directly or indirectlymajority-owned by one or more personsdescribed in prong (i), (ii), (iii), (iv), or (v) and inwhich such person(s) bears unlimitedresponsibility for the obligations and liabilities ofthe legal entity; and

(viii) any individual account or joint account(discretionary or not) where the beneficial owner



MiFID II

Under MiFID II, certain standardizedderivatives contracts must be traded onregulated trading venues, which may includethird country (non-EU) trading venues,provided that the third country:

• Is deemed to have a legal andsupervisory framework for tradingvenues equivalent to that of the EU;and

• has an equivalent system for therecognition of EU trading venues forthe purposes of any similar tradingobligation in the third country'sjurisdiction.

The trading obligation will also apply to non-EU entities that would be subject to theclearing obligation if they were established inthe EU and which enter into derivativestransactions that have a "direct, substantialand foreseeable effect" within the EU, orwhere the application of the trading obligationis necessary or appropriate to prevent theevasion of any provision of MiFIR.

(or one of the beneficial owners in the case of ajoint account) is a person described in any ofthe above prongs.

• The above definition is non-exhaustive.Parties may ask CFTC staff for writtenadvice or guidance as to their status.

• A foreign branch of a US person would becovered by virtue of the fact that it is a part,or an extension, of a US person.

• A US branch of a non-US swap dealer ornon-US MSP is a non-US person (however,it is still subject to Dodd-Frank).

This latter requirement that a US branch of anon-US swap dealer, though a non-US person,is still subject to Dodd-Frank is based onfootnote 513 of the Interpretive Guidance. InNovember, 2013, the CFTC Staff issued aclarification with regards to this footnote, statingthat non-US SDs/MSPs who regularly usepersonnel or agents located in the US toarrange, negotiate, or execute a swap with non-US person generally would be required tocomply with Transaction-Level requirements.The CFTC Staff’s reasoning was based on thefact that such persons perform core, front-officeactivities in the US, and thus must be subject toDodd-Frank. However, the CFTC has issuedtime-limited no-action relief from compliancewith this requirement until 30 September 2015.

Substituted compliance

Substituted compliance is a concept wherebycounterparties may comply with their homejurisdiction’s laws and regulations in lieu ofcompliance with CFTC rules. The CFTC mustfirst determine that such foreign jurisdiction’srequirements are comparable with and ascomprehensive as the corollary areas ofregulatory obligations encompassed by theentity-level and transaction-level requirements.

The CFTC’s substituted compliancedeterminations may be made on a requirement-by-requirement basis rather than on the basis ofa regime as a whole. Thus, market participantseligible for substituted compliance may have tocomply with US regulations for somerequirements and may comply with their homejurisdiction rules for other requirements,depending on how much of their homejurisdiction regime is covered by CFTCsubstituted compliance determinations.



On 20 December 2013, the CFTC issued entity-level comparability determinations for swapdealers and MSPs for the European Union,Switzerland, Hong Kong, Australia, Japan andCanada derivatives regulation regimes andtransaction-level substituted compliancedeterminations for certain regulations for theEuropean Union and Japan regimes.

Entity-level requirements

For entity-level requirements, swap dealers andmajor swap participants must comply withDodd-Frank or substituted compliance by theearlier of (1) 21 December 2013 or (2) 30 daysafter the issuance of an applicable substitutedcompliance determination for relevant entity-level requirement of the relevant jurisdiction.

Transaction-level requirements

The CFTC’s swap dealer oversight division hasissued an advisory stating that it believes that anon-US swap dealer (regardless of whether it isan affiliate of a US person) regularly usingpersonnel or agents located in the US toarrange, negotiate, or execute a swap with anon-U.S. person generally would be required tocomply with transaction-level requirements.

Pursuant to CFTC no-action relief, non-USswap dealers (regardless of whether they areaffiliated with a US person) that enter intoswaps with non-US persons that are notguaranteed affiliates or conduit affiliates of a USperson using personnel or agents located in theUS to arrange, negotiate or execute such swapsdo not have to comply with transaction-levelrequirements until 30 September 2015 (exceptthat if such a swap is with a non-US swapdealer, then multilateral portfolio compressionand swap trading relationship requirements areoutside the scope of this relief). Accordingly, forthose types of transactions, the followingdeadlines do not apply.

Clearing for swaps between US persons andnon-US swap-dealers, non-US MSPs or foreignbranches of US swap dealers or MSPs wentinto effect on 9 October 2013.

For other transaction-level requirements (e.g.,execution on an SEF, swap-trading relationshipdocumentation) for swaps with non-US swapdealers and MSPs or foreign branches of USswap dealers or MSPs (in either situation, onlythose in the EU, Switzerland, Hong Kong,Australia, Canada and Japan), compliance withDodd-Frank or substituted compliance is



required by the earlier of (1) 21 December 2013or (2) 30 days after the issuance of anapplicable substituted compliancedetermination for the relevant transaction-levelrequirement of the relevant jurisdiction.Real-time reporting for swaps between foreignbranches of US swap dealers and MSPs in EU,Switzerland, Hong Kong, Australia, Canada andJapan and guaranteed affiliates of US personswent into effect on 30 September 2013.

Transaction-level requirements for swaps withforeign branches of US swap dealers andMSPs located outside the jurisdictions listedabove went into effect on 9 October 2013.

Swaps between guaranteed affiliates of USpersons are subject to Dodd-Frank beginning 9October 2013.

Swaps between non-US swap dealers andMSPs and guaranteed affiliates of US personsare subject to Dodd-Frank beginning:

• 30 September 2013 if the non-US swapdealer or MSP is in EU, Switzerland, HongKong, Australia, Canada and Japan

• 9 October 2013 otherwise

Foreign branches

The swap should be considered to be with theforeign branch of a US bank if:

(i) the employees negotiating and agreeing tothe terms of the swap (or, if the swap isexecuted electronically, managing theexecution of the swap), other thanemployees with functions that are solelyclerical or ministerial, are located in suchforeign branch or in another foreign branchof the US bank;

(ii) the foreign branch or another foreignbranch is the office through which the USbank makes and receives payments anddeliveries under the swap on behalf of theforeign branch pursuant to a master nettingor similar trading agreement, and thedocumentation of the swap specifies thatthe office for the US bank is such foreignbranch;

(iii) the swap is entered into by such foreignbranch in its normal course of business;

(iv) the swap is treated as a swap of the foreignbranch for tax purposes; and

(v) the swap is reflected in the local accounts



of the foreign branch.

Guarantees and affiliate conduits

Transaction-level requirements apply to swapswith non-US persons that are guaranteed by, or"affiliate conduits" of, a US person.

"Guarantee’’ includes not only traditionalguarantees of payment or performance of therelated swaps, but also other formalarrangements that, in view of all the facts andcircumstances, support the non-US person’sability to pay or perform its swap obligationswith respect to its swaps. It is the substance,rather than the form, of the arrangement thatdetermines whether the arrangement should beconsidered a guarantee.

The following factors are relevant in determiningwhether a non-US person is an affiliate conduit:

(i) the non-US person is majority-owned,directly or indirectly, by a US person;

(ii) the non-US person is controlled by, or is incommon control with, the US person;

(iii) in the regular course of business, the non-US person engages in swaps with non-USthird parties for the purpose of hedging ormitigating risks faced by, or to takepositions on behalf of, its US affiliate(s), andenters into offsetting swaps or otherarrangements with such US affiliates(s) inorder to transfer the risks and benefits ofsuch swaps with third parties to its USaffiliate(s); and

(iv) the non-US person’s financial results areincluded in the consolidated financialstatements of the US person.



Business Conduct There are detailed existing conduct ofbusiness rules for investment firms and creditinstitutions under MiFID that nationalregulators are required to have transposedinto national regulation.

MiFID II expands the existing MiFIDrequirements and the main changes include:

• advisers in financial instruments will haveto elect whether to be independent (i.e.advising on the whole market) or restricted(i.e. advising on a limited range ofproducts);

• payment of commission to third partiessuch as issuers or product providers willbe restricted in certain circumstances;

• ESMA, the EBA and national regulatorswill be permitted to intervene to ban orrestrict products in certain circumstances;and

• the conduct of business rules will beextended so that they apply to eligiblecounterparties.

17 CFR Parts 4 and 23

"Know your counterparty" provisions: swapdealers must implement policies andprocedures designed to obtain and retain arecord of the essential facts concerning eachknown counterparty that are necessary forconducting business with the counterparty.

Prohibition on fraud, manipulation and otherabusive practices.

Swap dealers and MSPs must verify thatcounterparties meet the eligibility standards foran eligible contract participant.

Prior to entering into a swap, swap dealers andMSPs must disclose to their counterparties(other than swap dealers, MSPs, security-basedswap dealers or major security-based swapparticipants) material characteristics and risks ofthe swap as well as the swap dealer’s or MSP’smaterial incentives and conflicts of interest,amongst other disclosures.

Swap dealers and MSPs must inform theircounterparties that they have the sole right tochoose the DCO or, for swaps not subject tomandatory clearing, that they may elect to havethe swap cleared.

Swap dealers that recommend a swap or atrading strategy involving a swap mustundertake reasonable diligence to understandthe potential risks and rewards and must have areasonable basis to believe that therecommended swap or strategy is suitable forthe counterparty, unless a safe harborexception applies.


The final rules pursuant to the Volcker Rule were issued on 10 December 2013 and were published on 31 January 2014in 17 CFR Part 75.

Prohibited activities

The Volcker Rule generally prohibits "banking entities" from:

• engaging in proprietary trading;

• acquiring and retaining any "ownership interest" in or sponsoring "covered funds";

• entering into (or their affiliates entering into) "covered transactions" with a covered fund that the banking entity sponsors orto which it provides investment advice or investment management services (the so-called "Super 23A prohibition" becauseit incorporates the restrictions under Section 23A of the Bank Holding Company Act but without the benefit of thatprovision's exclusions); and

• engaging in transactions otherwise permitted under specified provisions of the Volcker Rule if the transaction involves orresults in specified conflicts of interest.

Covered Funds

Volcker RuleDodd-Frank Section 61917 CFR Part 75

All entities that rely on Section 3(c)(1) or Section 3(c) (7) of the US Investment Company Act of 1940 as an exemption fromregistration under such Act are "covered funds" unless an exclusion from being a covered fund applies.

Many structured finance and some ABS issuers rely on Section 3(c)(1) [less than 100 investors] or Section 3(c)(7) [only qualifiedinstitutional buyers/qualified purchasers] exemptions and thus are likely to be "covered funds". Excluding a fund from thedefinition of covered funds has significant beneficial consequences including that a banking entity may acquire and retain any"ownership interest" in or sponsor such fund and may engage in activities with the fund that would otherwise be prohibitedcovered transactions.

Under the "loan securitization exclusion" a banking entity is allowed to own and sponsor a fund that is an ABS issuer, the assetsof which are solely composed of:

• loans (defined as any loan, lease, extension of credit or secured or unsecured receivable that is not a security or derivative);

• rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of asset-backed securitiesand rights or other assets that are related or incidental to purchasing or otherwise acquiring the loans (if such assets aresecurities, they must be cash equivalents or securities received in lieu of debts previously contracted with respect to theloans supporting the asset-backed securities);

• interest rate or foreign exchange derivatives that (i) directly relate to the terms of such loans or contractual rights; and (ii) areused for hedging purposes with respect to the securitization structure (notional amount must be tied to the securitizationexposure); and

The Volcker Rule - Proprietary Transactions in the US


• special units of beneficial interest and collateral certificates that meet the following requirements.

Covered Transactions


• extensions of credit;

• investments in securities (other than fund ownership interests permitted under the Volcker Rule);

• purchases of assets from the fund (including repos);

• acceptance of securities from the covered fund as collateral for a loan made by the banking entity;

• issuances of guarantees, acceptances or letters of credit on behalf of the covered fund; and

• exposure to the covered fund arising out of derivative, repo and securities lending transactions.

For ABCP conduits and certain other ABS issuers, the Super 23A prohibition as written in the proposed rule was problematicbecause it would have prevented a bank sponsor/investment adviser/manager from providing credit, hedging or liquidity facilitiesto support such transactions. By excluding various structures from the definition of covered fund, the final rule will resolve thisissue for many structured finance transactions.

Possible structured notes and structured finance exclusions


Any structured finance entity that meets the requirements for an exclusion under Rule 3a-7 or section 3(c)(5) of the InvestmentCompany Act, or any other exclusion or exemption from the definition of "investment company" under the Investment CompanyAct (other than sections 3(c)(1) or 3(c)(7) of the Investment Company Act), does not fall under the definition of "covered fund"..Rule 3a-7 was adopted in 1992 to exclude asset backed structured finance issuers from the definition of investment companyunder the Act upon the satisfaction of certain conditions, including:

• that the issuer issues fixed-income or other securities which entitle their holders to receive payments that depend primarilyon the cash flow from eligible assets; and

• at the time of initial sale, the securities are rated in one of the four highest categories assigned to long-term debt, or anequivalent for short-term debt, by at least one nationally recognized statistical rating agency or are sold to "accreditedinvestors" or "qualified institutional buyers" as such terms are defined in the Securities Act of 1933.

Foreign banking entities are permitted to acquire or retain ownership in, or to sponsor, a covered fund under the followingcircumstances:

• the banking entity must not be directly or indirectly controlled by a banking entity that is organized under federal or state laws;

• to qualify for the exemption, the banking entity must either be a qualifying foreign banking organization conducting the activityin compliance with subpart B of the Federal Reserve Board’s Regulation K or meet at least two of the following on a fullyconsolidated basis:

(i) total assets held outside of the US exceed total assets held in the US;

(ii) total revenues derived from outside of the US exceed total revenues derived from in the US; or

(iii) total net income derived from outside of the US exceeds total net income derived from in the US.

• no ownership interest in the covered fund is offered for sale or sold to a resident of the US; and

• the activity must have occurred solely outside of the US.


Conformance Period


Regulations under the Volcker Rule went into effect on April 1, 2014 but initially provided for a "conformance period" through July21, 2015, which was extended to July 21, 2017.

The Federal Reserve Board has issued guidance which provides that banking entities by statute have to conform all of theiractivities and investments to the Volcker Rule, and that "during the conformance period, banking entities should engage in good-faith planning efforts, appropriate for their activities and investments, to enable them to conform their activities and investmentsto the requirements of [the Volcker Rule] and final implementing rules by no later than the end of the conformance period."

• June 30, 2014 – banking entities with $50 billion or more in consolidated trading assets and liabilities began reportingquantitative measurements to regulators

• July 21, 2015 – beginning of Volcker Rule compliance

• April 30, 2016 – banking entities with at least $25 billion but less than $50 billion in consolidated trading assets andliabilities must begin reporting quantitative measurements to regulators

• December 31, 2016 – banking entities with at least $10 billion but less than $25 billion in consolidated trading assetsand liabilities must begin reporting quantitative measurements to regulators

Conflict of interest


Banking entities cannot engage in permitted covered transactions or permitted proprietary trading activities if they would:

(i) involve or result in a material conflict of interest between the banking entity and its clients, customers orcounterparties;

(ii) result, directly or indirectly, in a material exposure by the banking entity to a high-risk asset or a high-risk tradingstrategy; or

(iii) pose a threat to the safety and soundness of the banking entity or to the financial stability of the US.

A material conflict exists if the bank enters into any transaction, class of transactions or activity that would result in the bank’sinterests being materially adverse to interests of its client, customer or counterparty, unless the bank has appropriatelyaddressed and mitigated the conflict through timely and effective disclosure or informational barriers.

This comparison table is for guidance only and should not berelied on as legal advice in relation to a particular transactionor situation.

This paper reflects key EU and US regulatory developmentsrelating to derivatives as at 10 June 2015.


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