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G20 FINANCIAL REFORM


Dodd-Frank and EMIR are partially tempered by a number of indications that a harmonised approach to the regulation of trading in derivatives was envisaged by the legislators, evident through (i) specific provisions aimed at recognising compliance with comparable regimes and (ii) a number of areas of convergence between the two sets of rules in practice. However, as has become increasingly apparent, the broad drafting of the extraterritoriality provisions has left them open to an extremely generous interpretation, thereby giving the authorities considerable scope to impose their requirements more broadly than accepted principles of comity would support. Correspondingly, the perception remains among commodity market participants (and some regulators) that the level of coordination between regulators is simply not adequate.


Carve-Out For Equivalent Regimes Each of Dodd-Frank and EMIR provide an


explicit carve-out by which transactions that would theoretically be subject to the extraterritorial reach of the rules may be deemed to be compliant if they already adhere to the laws of a third country jurisdiction which have the same (or roughly similar) effect.


... the lack of coordination on a global scale has resulted in a disjointed implementation process


EMIR contains a ‘mechanism to avoid duplicative


or conflicting rules’, by which the European Commission is required to monitor international rules and highlight provisions that could duplicate or conflict with EMIR. The provision also empowers the European Commission to adopt (and regularly review) implementing acts to declare that the legal, supervisory and enforcement arrangements of a third country are equivalent to EMIR if they:


(i) are equivalent to the requirements laid down under Articles 4 (the ‘clearing obligation’), 9 (the ‘reporting obligation’), 10 (rules governing ‘non-financial counterparties’ who exceed the ‘clearing threshold’) and 11 (risk mitigation requirements for uncleared over-the-counter derivatives contracts);


(ii) provide protection of professional secrecy equivalent to that provided by EMIR; and


(iii) are being effectively applied and enforced by the third country in question.


Once an implementing act has been adopted


with regards to a particular country, counterparties entering into a transaction subject to EMIR will


16 December 2012


CFTC’s proposed guidance, in order for this to be effective, the CFTC must carry out a rule by rule analysis and form a conclusion that, in each case, the non-US requirements adequately compare to requirements under the Commodity Exchange Act and CFTC regulations. In contrast with EMIR, the initiative for a finding


of substituted compliance will be made from the industry upwards; an entity (or a group of non-US persons from the same jurisdiction, or a foreign regulator on behalf of an entity) will need to make an application for this purpose. Further to considering such an application, the CFTC may also decide to enter into a memorandum of understanding or similar formal arrangement with the foreign supervisor. Similar problems exist with the CFTC’s overly broad definitions of US person and its treatment of aggregation across affiliated entities.


Unintended Consequences – Undermining Commodity Markets While the implantation of new regimes


under Dodd-Frank and EMIR are intended to effect broadly the same outcome, the lack of


automatically be deemed to have complied with the specific articles of EMIR set out above if at least one of them is established in the relevant third country. The proposed guidance published by the CFTC


pursuant to Dodd-Frank includes provisions for limited ‘substituted compliance’. This is a mechanism by which non-US swap dealers and major swap participants can, in some circumstances, comply with entity level and transaction-level requirements (such as record keeping, data reporting, mandatory clearing, and margining) imposed by their home jurisdiction in lieu of those of the CFTC. Under the


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