Citing significant progress on harmonizing cross-border swaps regulations between the European Union and United States, regulators on both sides of the Atlantic have struck their latest agreement.

An effort to resolve regulatory differences, an initiative, dubbed “Path Forward,” has occupied both parties for several months and at times has been quite contentious. However, last week, European Commissioner Michel Barnier and Mark Wetjen, acting chairman of the U.S. Commodity Futures Trading Commission, announced an agreed upon regulatory framework for both CFTC regulated swap execution facilities (SEFs) and EU-regulated multilateral trading facilities (MTFs).

The problem that lurks behind the agreement is that, because of the global nature of derivatives transactions, the simultaneous application of each other's requirements could lead to overlapping demands, legal conflicts, inconsistencies, and legal uncertainty. Because of the Dodd-Frank Act, numerous swap trading rules are already in place. At best, the EU will add similar rules by 2016. To address this, the CFTC and the European Commission, in collaboration with the European Securities Market Authority, posited that jurisdictions and regulators should be able to defer to each other when it is justified by “the quality of their respective regulation and enforcement regimes.”

Contrary to an earlier CFTC stance to impose U.S. rules on foreign swaps trades, swaps regime, the deal struck last week eases up on foreign entities and extends time-limited, transitional relief to MTFs faced with more stringent trade execution requirements. That relief, however, granted through a Conditional No-Action Letter, comes with contingencies, including sufficient pre- and post-trade price transparency, comparable provisions for non-discriminatory access by market participants, and appropriate governmental oversight.

MTFs, presently regulated under the EU's Markets in Financial Instruments Directive, are expected to meet the CFTC conditions set out in the Conditional No-Action Letter. The CFTC  is developing rulemaking for foreign-based swap trading platforms to seek appropriate regulatory treatment under American law. U.S. firms can conduct swaps trades in Europe, provided the platform used meets their domestic regulations.

“This is an important further step in implementing a joined up, consistent global approach to ensure that financial markets work for the benefit of the real economy,” Barnier said in a statement. “This agreement shows how, as G20 commitments move from words to action, regulators can and should work together to ensure that their respective rules interact with each other in the most effective and efficient fashion. This needs to be done without creating regulatory overlaps or loopholes this creating a global level playing field for operators."

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