Five years on from the G20's commitment to implement measures to increase transparency and reduce risk in the derivative markets, there have been significant changes to regulations affecting the derivatives markets in the European Union. However, many new rules are still not yet in force and some, such as the margin requirements under the European Market Infrastructure Regulation, will not be fully implemented until 2020.
The European Commission recently published the final delegated regulation on the margin requirements for derivative trades not cleared by a central counterparty. Under the European Market and Infrastructure Regulation, certain counterparties will need to exchange both initial and variation margin in respect of derivative trades not cleared by a central counterparty. These rules will have far-reaching consequences for derivatives documentation.
The European Commission has introduced a new EU regulation on over-the-counter derivatives, central counterparties and trade repositories. The regulation provides clearing obligation and risk mitigation techniques for certain derivative contracts, trade reporting, registration, financial and risk management requirements for clearing organisations and new trade execution requirements.
Commodity Futures Trading Commission (CFTC) Chair J Christopher Giancarlo and Chief Economist Bruce Tuckman recently published a white paper on potential reforms to the CFTC's swaps trading rules. The white paper proposes a series of changes to rules relating to transactions on swap execution facilities. Accompanying statements note that commission staff is expected to propose a formal rulemaking in this area in Summer 2018.
Virtual currency exchange Gemini recently released a proposal to create the first self-regulatory organisation for US virtual currency exchanges. The so-called 'Virtual Commodity Association' (VCA), as envisioned, would be a non-profit, independent regulatory organisation that would operate to foster responsible virtual commodity markets. The VCA would also encourage greater cooperation with relevant regulators in an effort to assist with the maturation of the virtual commodity industry.
The US District Court for the Eastern District of New York recently confirmed that virtual currencies are a commodity within the anti-fraud jurisdiction of the Commodity Futures Trading Commission (CFTC). The ruling marks the first time that a federal court has affirmed the CFTC's 2015 determination that virtual currencies are 'commodities' as defined by the act. This provides the CFTC with further standing to police fraud in virtual currency spot markets.
Although changes in the regulatory landscape were limited in 2017, several steps, including the Capital Markets Report and Project KISS, may lay the groundwork for more significant developments to come, particularly now that regulatory agencies have new leadership and senior staff and have had an opportunity to review market participant feedback. There also remain a number of outstanding issues and emerging issues that are likely to demand regulatory attention in the coming year.
The US Department of the Treasury recently released its second in a series of four reports evaluating the US financial regulatory system. As it relates to the derivatives markets, the report does not advocate fundamental changes in the regulatory framework but suggests a change in regulatory emphasis. Further, it makes a series of specific recommendations that would broadly make incremental improvements suggested by market participants.
The UK Financial Conduct Authority (FCA) recently published a discussion paper to gauge market participants' views on how the future development of distributed ledger technology (DLT) should be regulated by the FCA in FCA-regulated markets. As industry efforts to use DLT continue, the FCA expects that in the second half of 2017 and into 2018 there will be more movement from the 'proof of concept' stage to 'real-world' deployments.
While the impact of Brexit would depend on the precise terms of the outcome of the exit negotiations, there are potential issues that may affect derivative transactions. Given the importance of the derivatives market to the United Kingdom, a post-Brexit UK government would be keen to ensure that the protections for derivative transactions remain in place, and that the United Kingdom continues to benefit from any cross-border arrangements.