Background

Since the collapse of Lehman Brothers in 2010, politicians have wanted to bring the Over The Counter (OTC) derivatives markets under greater control. Their approach to this in the US Congress was to pass a long and complex reform law now referred to as the Dodd Frank Act, named after Chris Dodd and Barney Frank, the two senators who sponsored the bill. Having approved the Dodd Frank Act, the two major regulators, the Securities and Exchanges Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) have been transforming the 2300 page law into practical rules to be implemented by banks and financial institutions.

Likewise in Europe, the political process resulted in the European Markets Infrastructure Regulation (EMIR). This is being translated into practical rules by the European Securities and Markets Authority (ESMA).

There are three major areas of change:

 

A fourth area should also be considered:

 

Each of these will have an impact on FX trading, however this page will only address the required Trading and Best Practice changes.

Also, whilst US and EU reforms are broadly parallel in nature, we should not assume that implementing one will satisfy the other. Eg Dodd-Frank requirements will satisfy EMIR requirements or vice versa.

The sections below set out a summary of the key requirements.

Dodd-Frank / SEF

NOTE: The CFTC Division of Swap Dealer and Intermediary Oversight (DSIO) issued a no-action letter stating that DSIO will not recommend that the Commission take an enforcement action against a swap dealer or major swap participant for failure to disclose the pre-trade mid-market mark, as required by Regulation 23.431(a)(3), to a counterparty in a Covered Forex Transaction, provided that:

  1. real-time tradeable bid and offer prices for the Covered Forex Transaction are available electronically, in the marketplace, to the counterparty; and
  2. the counterparty to the Covered Forex Transaction agrees in advance, in writing, that the swap dealer or major swap participant need not disclose a pre-trade mid-market mark. The relief provided in the letter is applicable to all SDs and MSPs.

 

NOTE: Pre-trade mid-market quotation should not be required for FX deliverable forwards and swaps with a maturity date of one year or less and that involve a currency pair where both currencies are one of the top 13 deliverable currencies (by volume):

 

These 13 Currencies comprise the 13 most liquid currencies (excluding the Korean won, which is a restricted currency) of the set of 17 currencies settled on CLS.

Summary:

Requirements:

EMIR

MiFIDII

TBD