Category: Global Regulatory Development

1
United States: CFTC Reaches Settlement with Oil and Natural Gas Advisor for Failure to Register as a SEF
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United States: CFTC Proposes New Rules for Derivatives Clearing Organizations
3
United States: CFTC Extends Position Limits Aggregation Relief
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JAPAN: Proposed Code of Conduct for ESG Evaluation and Data Providers Presents Significant Implications for Asset Management and Investor Communities
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Europe: Systemically important outsourced service providers, eg cloud services, to be identified and regulated in the UK    

United States: CFTC Reaches Settlement with Oil and Natural Gas Advisor for Failure to Register as a SEF

By: Cheryl L. Isaac and Spencer D. Warkentin

On September 26, 2022, amidst a flurry of other enforcement actions, the Commodity Futures Trading Commission (“CFTC”) announced the settlement of its administrative action against Asset Risk Management, LLC (“ARM”) in the amount of $200,000. The CFTC found that ARM operated an unregistered swap execution facility (“SEF”) for a period of 5 years, from September 2017 to the present.

Under the Commodity Exchange Act and CFTC regulations, any entity that operates a “trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform” must register as a SEF or designated contract market (“DCM”).  In this case, ARM facilitated, negotiated and executed swaps between and among about 70 clients and 20 to 30 swap counterparties.  In doing so, ARM (i) obtained requests for swap pricing from clients; (ii) transmitted those requests to multiple swap counterparties; (iii) where authorized, approved or rejected counterparty pricing (leading to swap execution); and (iv) subsequently confirmed swap executions with the client.

Even though ARM did not have a traditional exchange platform, the CFTC determined that ARM’s business could indeed be classified as a “multiple-to-multiple” trading system designed to facilitate the execution of swaps.  Interestingly, the ARM Order focused on the ability of multiple participants to execute or trade swaps, regardless of whether the platform actually allows multiple participants to simultaneously request, make, or accept bids and offers.  The CFTC noted that certain “one-to-many” platforms may be considered as multiple-to-multiple trading systems, such as a request-for-quote (“RFQ”) system, where a single requestor initiates a one-to-many RFQ to multiple participants. The CFTC distinguished this type of platform from a liquidity provider, in which one sponsoring entity is the counterparty to all swaps executed through the platform. Under those circumstances, the platform would not be required to register as a SEF or DCM.  

The ARM Order serves as a reminder to derivatives market participants that it is necessary to examine the particular facts and circumstances of any given trading system in order to determine whether a “multiple-to-multiple” platform exists, and whether registration as a SEF or DCM is required.

United States: CFTC Proposes New Rules for Derivatives Clearing Organizations

By: Cheryl L. Isaac and Matthew F. Phillips

On July 27, 2022, the Commodity Futures Trading Commission (“CFTC”) proposed a series of amendments to the Commodity Exchange Act (the “Exchange Act”) designed to enhance its governance standards for Derivatives Clearing Organizations (“DCOs”).

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United States: CFTC Extends Position Limits Aggregation Relief

By: Cheryl L. Isaac and Michael G. Lee

On August 10, 2022, the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) issued a no-action letter (NAL), CFTC Staff Letter No. 22-09 (NAL 22-09), temporarily extending relief regarding certain position aggregation requirements until the earlier of either August 12, 2025 or the effective date of any relevant rulemaking. This relief was first provided in CFTC Staff Letter No. 17-37 (NAL 17-37) on August 10, 2017, and subsequently extended in CFTC Staff Letter No. 19-19 (NAL 19-19) on July 31, 2019. The extended relief provided by NAL 19-19 was set to expire on August 12, 2022, two days before the issuance of NAL 22-09. The DMO stated that it would use the newly extended time to assess the impact of the relief, including whether it hinders the CFTC staff’s ability to conduct market surveillance, particularly in light of so many new contract markets and market participants becoming subject to the Position Limits for Derivatives Final Rule.  The CFTC will also consider a rulemaking process to codify the relief set forth in NAL 22-09.

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JAPAN: Proposed Code of Conduct for ESG Evaluation and Data Providers Presents Significant Implications for Asset Management and Investor Communities

By Yuki Sako

On 12 July 2022, as widely anticipated, the Financial Services Agency of Japan (“FSA”) proposed “the Code of Conduct for ESG Evaluation and Data Providers” (“Proposed Code”), and is soliciting comments from the public until 5 September 2022.

The stated focus of the Proposed Code is to provide a set of principles and guidelines for ESG evaluation and data providers (“Provider(s)”) that would require Providers who decide to endorse such code to “comply or explain” such code, i.e., a Provider would be required to comply with, or provide an explanation as to why the Provider is departing from, such code.

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Europe: Systemically important outsourced service providers, eg cloud services, to be identified and regulated in the UK    

By: Kai Zhang

In an 8 June 2022 policy statement,  the UK Government proposes a specific regime for supervising “critical” service providers to the financial services industry. This is to address concentration risk as many regulated firms rely on a few large service providers whose failure could potentially threaten the stability of, or confidence in, the UK’s financial system.   The Government observes that in 2020 over 65% of UK regulated firms used the same four cloud providers for cloud infrastructure services.

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