Global Regulatory Update - ISDA

Global Regulatory Update
April 20, 2011
Global Regulatory Update tracks legislative and regulatory activities in the jurisdictions in which ISDA
maintains a presence.
UNITED STATES
Heat intensifies against Dodd-Frank in DC
Congressional Republicans concerned with the speed and breadth of the rulemakings implementing Title VII
of the Dodd-Frank Act have introduced legislation that would extend the effective date of the Act and
implementing regulations for 18 months or more, with several exceptions for promulgation of key
definitions and data reporting requirements. The legislation, which was offered by the Chairmen of the
House Financial Services and Agriculture Committees and the Chairmen of the General Farm Commodities
and Capital Markets Subcommittees, would also require the CFTC and SEC to engage in fulsome costbenefit
analyses of the rules and would provide the agencies with limited exemptive authority.
Separately, Rep. Grimm (R-NY) has offered legislation that would refine the definition of end-user in an
attempt to provide additional certainty to commercial end-users, particularly with respect to the margin
requirements.
Also, the CFTC Inspector General responded earlier this week to a Congressional inquiry into the CFTC's
cost-benefit analyses of its Dodd-Frank proposals by concluding that the Commission has not sufficiently
analyzed the impact of the proposed rules.
Contact: Christopher Young - cyoung@isda.org
Joint associations comment on US agencies’ market risk capital rules
On April 11, ISDA along with the Clearing House Association, American Bankers Association, Institute of
International Finance and SIFMA (the associations) filed a comment letter on a notice of proposed
rulemaking (NPR) issued by the Federal Reserve, OCC and FDIC to revise their market risk capital rules
(the agencies). The letter generally suggests aligning the rules with Basel 2.5.
The associations expressed a number of concerns with the approach taken in the NPR. The redundancy in
Basel 2.5’s market risk calculations requires a fundamental review. Also, agencies need to be direct and
transparent in identifying areas where the proposed market risk capital rules differ from Basel 2.5. The
associations are concerned that the proposed market risk capital rules go beyond Basel 2.5, adding a
number of provisions that increase the conservatism of the US approach and, in doing so, creating
competitive concerns for US banks. The associations do not believe that the comparable provisions in Basel
2.5 are unduly lax, and thus urge the Agencies to follow the global approach except where unique US
circumstances warrant national treatment.
Although these concerns are not practical to address in the short term, the associations expect these will be
addressed in the fundamental review being undertaken by the Basel Committee Banking Standards Trading
Book Group.
Contact: Edwin Budding – ebudding@isda.org
EUROPE
ISDA AGM: Keynote public policy address by Steven Maijoor, ESMA Chair
On April 13, the Chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, gave a
speech at ISDA's AGM held in Prague. In his speech Mr. Maijoor introduced ESMA's role in the new
European System of Financial Supervision, in particular with respect to the reform of derivatives markets.
He discussed the importance of effective supervision of credit rating agencies; ESMA's role in the European
single rule book; its powers to promote transparency, simplicity and fairness in markets; its role in
contributing to financial stability by monitoring, assessing and measuring systemic risk, and in ensuring a
level playing field in financial supervision.
Mr. Maijoor noted that the industry has worked to improve the resilience of OTC derivatives markets, but
argued that industry commitments, while important, are not sufficient. He indicated that, in order to reduce
counterparty and systemic risk and increase transparency to both market participants and regulators,
global financial reforms are needed. He added that while trade repositories will play a major role in
improving transparency, it is essential that they are appropriately regulated.

Mr. Maijoor noted that there are limits to what can actually be traded on regulated markets, MTFs or other
organised trading facilities. He said that although there are differences in the way in which derivatives can
be traded compared to equities, certain features of the equities market structure need to be brought to
derivatives trading, notably transparency, liquidity, operational efficiency and equal market access. Click to
read the full speech.
EU Presidency compromise proposal on EMIR; working group meeting
On April 11, the Council of Ministers of the European Union (under the Hungarian presidency) published the
latest Council compromise text on EMIR. The scope covers all derivatives. Key aspects include:
Several definitions are added, including: remaining maturity, group, intra-group transaction and
pension scheme. Discussions will continue regarding the definition of private pension scheme;
The frontloading option with back stop date (EMIR entry into force) is maintained. However, if the
remaining maturity of the frontloaded contract is less than a period of time defined by the EC following
advice by ESMA, the contract is not subject to clearing. Full backloading for reporting is maintained;
An intra-group transaction exemption is introduced, though this seems likely to be geographically
limited to the EU;
The clause by which EMIR prevails over any conflicting law of the Member States was deleted;
ESMA is entrusted with new competencies when it comes to Trade Repositories, including: charging
supervisory fees to cover registration and supervision expenses, imposing fines, taking supervisory
measures. ESMA may delegate specific supervisory tasks to competent authorities of a Member State.
This document was used during the meetings of the Council of Ministers Working Group of April 13-14.
Most Member States did not oppose the new definition of intra-group transaction exemption, though further
drafting is expected in the next text. Other developments from the meeting:
Forex Exchange Transactions. The recitals of the text propose to take into account the specificities of
the forex transactions, such as settlement and risk when it comes to determine their clearing
obligation. However, during the discussions, the EC and certain States advocated deletion of
settlement risk from the relevant recital;
Reciprocity. There is a sense that the Member States are waiting for the US to clarify the position in
Dodd-Frank regarding extraterritoriality, mutual recognition etc. The Council of Ministers Working
Group would like to mirror this approach;
Segregation. Most of the Members States agreed that the client should be able to choose the adequate
level of segregation to meet its needs.
The next meeting is on May 3 and new compromise text is expected to be published at the end of April.
FSB progress report on OTC Markets Reform
On April 15, the Financial Stability Board (FSB) published its report monitoring progress made by different
jurisdictions in implementing the G20 reforms of OTC derivatives markets. In light of ongoing European
negotiations on EMIR (clearing & reporting of derivatives) and upcoming MiFID review (organized trading of
derivatives); FSB warns that G20 jurisdictions may not meet the G20’s end-2012 deadline. In this first
progress report, the FSB highlights this and other relevant issues:
International Consistency. There are some emerging differences of implementation across jurisdictions
and other potential inconsistencies, such as backloading of contracts, phasing in requirements, asset
classes covered by the clearing requirement, implementation of the top-down approach and organized
platform trading on multi vs. single-dealer platforms;
Organized trading of derivatives. FSB takes stock of IOSCO’s February report, but highlights that some
outstanding issues of disagreement, such as multiple liquidity providers, could result in regulatory
arbitrage. Besides that, FSB requests IOSCO to do further analysis on the market use of multi or
single-dealer platforms;
Trade repositories. Jurisdictions should follow the recommendations provided by the FSB in its October
2010 report. This report also identifies a number of aspects where jurisdictions differ, including depth
and breadth of data reported, reporting and storage format, identification of barriers to
collection/dissemination of data;
Central clearing. The report highlights differences in approach in some jurisdictions where no top-down
approach to clearing has been introduced;
Standardisation. FSB supports ongoing work of the ODSG with industry on standardization of
contractual terms and processes.
The deadline to provide comments to the FSB report on OTC Derivatives is May 16. An updated assessment
regarding the progress made will be published in October. Click here to read the ISDA note.
Contact: David Fernandez Valdes - dfvaldes@isda.org
FINANCIAL LAW REFORM
UNIDROIT group on close-out netting enforceability
ISDA participated in the initial meeting of a study group set up by UNIDROIT, the International Institute for
the Unification of Private Law. The study group is looking into the feasibility of an international instrument
on the enforceability of close-out netting. A preliminary draft report prepared prior to the meeting

examines the need for and desirability of harmonizing, on a global scale, the commercial and insolvency
law rules protecting netting agreements in the event of the insolvency of one of the parties. The report is
part of UNIDROIT's work on preparing an international instrument on netting of financial instruments. In
2008 ISDA made a suggestion to UNIDROIT to consider the feasibility of an international convention on
netting.
Contact: Peter Werner - pwerner@isda.org
ISDA Global Regulatory Update
Please direct comments and questions about Global Regulatory Update to Kevin Leech, kleech@isda.org.
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