The Managed Funds Association (“MFA”) published a comparative analysis of U.S. and European Union (“EU”) derivatives trading regimes, and made recommendations for further cross-border harmonization. The MFA found the two regimes to be aligned in many important areas. The MFA identified two areas where harmonization could be improved: (1) the calibration of the transparency regime in the EU, and (2) whether prearranged trading is permitted for instruments subject to the trading obligation in the EU.
The MFA made the following observations and recommendations:
- Pre-trade transparency/modes of execution: evaluate European Securities and Markets Authority (“ESMA”) “transitional transparency calculations” to ensure that liquidity classifications are appropriate and market participants receive adequate liquidity. The CFTC should consider allowing greater flexibility for execution on swap execution facilities.
- Prohibition on prearranged trading: ensure that prearranged trading is prohibited by ESMA except for block trades.
- Post-trade transparency: the length of public reporting delays differs between EU and U.S. regimes; ESMA should continue to evaluate transitional transparency calculations and should consider limitations on the use of the extended deferral program of four weeks.
- Straight-through processing: given that U.S. and EU rules are substantially similar, monitor to ensure that rules are faithfully implemented by trading venues.
- Impartial/non-discriminatory access to trading venues: given that U.S. and EU rules are substantially similar, monitor to ensure that rules are faithfully implemented by trading venues.
- Process for determining the derivatives subject to a trading obligation: the CFTC should consider undertaking greater oversight of the “made-available-to-trade” process.
- Scope of instruments covered by a trading obligation: instruments subject to regulation under both U.S. and EU regimes are substantially similar.
- Access to trading venue rulebooks: EU regulators should encourage trading facilities to disclose their rulebooks to market participants.
Lofchie Comment: CFTC Chair Giancarlo favors greater flexibility as to the means by which swaps are executed. Having a buy-side group support this direction should be further proof that the Chair is going in the right direction.
Another recommendation by MFA that is worth strong support (and Congressional amendment of Dodd-Frank) is the “made available to trade” process under which an exchange can effectively force a particular type of swap to be traded on exchange (if that type of swap is centrally cleared). Giving an exchange this type of power, where the exchange may be completely self-interested in its use of this authority, is, to put it politely, a very bad idea. Only the CFTC should have the authority to force any particular type of swap to be traded only on-exchange.