Derivatives, Legislative and Regulatory Weekly Update (October 4, 2024)

Client Alert | October 4, 2024

From the Derivatives Practice Group: On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the order that permits KalshiEX LLC to list contracts that allow Americans to bet on election outcomes.

New Developments

US Appeals Court Clears Kalshi to Restart Elections Betting. On October 2, the U.S. Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s order that permitted derivatives trading platform KalshiEX LLC to list contracts that allow Americans to bet on election outcomes. The Court said that the CFTC did not show how the agency or the public interest would be harmed by the “event” contracts. The CFTC’s motion was denied “without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of appeal.” [NEW]
CFTC’s Division of Clearing and Risk Announces Staff Roundtable Discussion on New and Emerging Issues in Clearing. On September 27, the CFTC announced that the Division of Clearing and Risk will hold a public roundtable on October 16, to discuss existing, new, and emerging issues in clearing. The roundtable will be held in the Conference Center at CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street N.W., Washington, D.C. The roundtable will include participants from derivatives clearing organizations, futures commission merchants (“FCM”), FCM customers, end-users, custodians, proprietary traders, public interest groups, state regulators, and others. The goal of the roundtable is to gather information and receive expert input from a wide variety of stakeholder groups. Topics to be covered include the custody and delivery of digital assets, digital assets and margin, full collateralization, 24/7 trading, non-intermediated clearing with margin, and conflicts of interest related to vertically integrated entities. [NEW]
CFTC Requests Public Comment on a Rule Certification Filing by KalshiEX LLC. On September 26, the CFTC requested public comment on a rule certification filing by KalshiEX LLC, which would amend its rulebook to include rules for a request for quote functionality and amendments to its prohibited transactions rule. The CFTC previously stayed KalshiEX LLC’s filing because, according to the CFTC, the submission presents novel or complex issues that require additional time to analyze and is potentially inconsistent with the Commodity Exchange Act or the CFTC’s regulations. Comments must be submitted on or before October 28, 2024.
CFTC Staff Extends No-Action Position for Certain Reporting Obligations Under the Ownership and Control Reports Final Rule. On September 25, the CFTC’s Division of Market Oversight (“DMO”) issued a no-action letter that extends the current no-action position for reporting obligations under the ownership and control reports final rule (“OCR Final Rule”). The OCR Final Rule, approved in 2013, requires the electronic submission of trader identification and market participant data for special accounts and volume threshold accounts through Form 102 and Form 40. DMO said that it is extending its no-action position to address continuing compliance difficulties associated with certain ownership and control reporting obligations identified by reporting parties and market participants. The position extends DMO’s position under CFTC Letter No. 23-14, stating that DMO will not recommend the CFTC commence an enforcement action for non-compliance with certain obligations. These obligations include, among others, the timing of ownership and control report form filings; certain information required to be reported regarding trading account controllers and volume threshold account controllers on Form 102; the reporting threshold that triggers the reporting of a volume threshold account on Form 102; the filing of refresh updates for Form 102; and responses to certain questions on Form 40. The no-action position will remain in effect until the later of the applicable effective date or compliance date of a CFTC action, such as a rulemaking or order, addressing such obligations.
CFTC Announces Four Orders Granting Whistleblower Awards – Marking the Most in a Single Day. On September 23, the CFTC announced awards totaling approximately $4.5 million for whistleblowers who, collectively, provided information that led to the success of multiple enforcement actions brought by the CFTC and another authority. The four orders granting awards, to a total of seven whistleblowers, are the most the CFTC has issued on a single day.
CFTC Staff Extends Temporary No-Action Letter Regarding Capital and Financial Reporting for Certain Non-U.S. Nonbank Swap Dealers Domiciled in the EU and the UK. On September 20, the CFTC’s Market Participants Division (“MPD”) announced it issued a temporary no-action letter extending CFTC Staff Letters No. 21-20 and 22-10 to certain nonbank swap dealers (“SDs”) domiciled in the EU and the UK that are the subject of pending CFTC reviews for comparability determinations regarding capital and financial reporting requirements. As part of the capital and financial reporting requirements for nonbank SDs, the CFTC adopted a substituted compliance framework that permits certain nonbank SDs to rely on compliance with home-country capital and financial reporting requirements in lieu of meeting all or parts of the CFTC’s capital adequacy and financial reporting requirements, provided the CFTC finds the home-country requirements comparable to the CFTC’s requirements. Through CFTC Staff Letter No. 24-13, issued on September 20, MPD is extending a no-action position to eligible nonbank SDs domiciled in the EU and the UK that are not covered by existing CFTC orders addressing capital and financial reporting requirements. The no-action position is conditioned upon the nonbank SDs remaining in compliance with applicable home-country capital and financial reporting requirements and submitting certain financial reporting information to the CFTC. The no-action position will expire by December 31, 2026 or the effective date of any final CFTC action addressing the comparability of capital and financial reporting requirements applicable to the relevant nonbank SDs.
CFTC Approves Final Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts. On September 20, the CFTC approved final guidance regarding the listing for trading of voluntary carbon credit derivative contracts. The guidance applies to designated contract markets (“DCMs”), which are CFTC-regulated derivatives exchanges, and outlines factors for DCMs to consider when addressing certain Core Principle requirements in the Commodity Exchange Act and CFTC regulations that are relevant to the listing for trading of voluntary carbon credit derivative contracts. The guidance also outlines factors for consideration when addressing certain requirements under the CFTC’s Part 40 Regulations that relate to the submission of new derivative contracts, and contract amendments to the CFTC.

New Developments Outside the U.S.

ESMA Launches New Consultations Under the MiFIR Review. On October 3, ESMA launched two consultations on transaction reporting and order book data under the Markets in Financial Instruments Regulation (“MiFIR”) Review. ESMA is seeking input on the amendments to the regulatory technical standards (“RTS”) for the reporting of transactions and to the RTS for the maintenance of data relating to orders in financial instruments. [NEW]
Joint UK Regulators Issue Press Release on the End of LIBOR. On October 1, the Bank of England published a joint press release with the FCA and the Working Group on Sterling Risk-Free Reference Rates on the end of LIBOR. On September 30, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased. The Working Group has met its objective of finalizing the transition away from LIBOR and will be wound down effective as of October 1. Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency and should ensure their use of term risk-free reference rates are limited and remain consistent with the relevant guidance on best practice on the scope of use. [NEW]
ESAs Appoint Director to Lead their DORA Joint Oversight. On October 1, the European Supervisory Authorities appointed Marc Andries to lead their new joint Directorate in charge of oversight activities for critical third-party providers established by the Digital Operational Resilience Act (“DORA”). In his role as DORA Joint Oversight Director, Marc Andries will be responsible for implementing and running an oversight framework for critical third-party service providers at a pan-European scale, contributing to the smooth operations and stability of the EU financial sector. [NEW]
ESMA 2025 Work Programme: Focus on Key Strategic Priorities and Implementation of New Mandates. On October 1, ESMA published its 2025 Annual Work Programme (AWP). A significant portion of ESMA’s work in 2025 will comprise policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, and the preparation of new mandates, such as the European Green Bonds and the ESG Rating Providers Regulations. [NEW]
ESMA Announces Next Steps for the Selection of Consolidated Tape Providers. On September 30, ESMA announced it will launch the selection procedure for Consolidated Tapes Providers (“CTPs”) bonds on January 3, 2025. In June 2025, ESMA will launch the selection procedure for the CTP for shares and Exchange-Traded Funds with the objective to adopt a reasoned decision on the selected applicant by the end of 2025. [NEW]
SFC and HKMA Publish Conclusions on Enhancements to OTC Derivatives Reporting Regime for Hong Kong. On September 26, the Securities and Futures Commission and the Hong Kong Monetary Authority jointly published conclusions on proposed enhancements to the over-the-counter (“OTC”) derivatives reporting regime for Hong Kong, indicating that they will mandate (i) the use of unique transaction identifiers, (ii) the use of unique product identifiers and (iii) the reporting of critical data elements beginning on September 29, 2025.

New Industry-Led Developments

ISDA Responds to UK FCA Consultation on DTO and PTRRS. On September 30, ISDA responded to Financial Conduct Authority (“FCA”) consultation CP24/14 on the derivatives trading obligation (“DTO”) and post-trade risk reduction services (“PTRRS”). In the response, ISDA highlights its support for including certain overnight index swaps based on the US Secured Overnight Financing Rate within the classes of derivatives subject to the DTO and expanding the list of PTRRS exempted from the DTO and other obligations. [NEW]
ISDA Publishes Results of Survey on AT1 Treatment in DRM Model. On September 27, ISDA published a survey of its members on the development of the dynamic risk management (“DRM”) model. The survey sought to understand the accounting and regulatory treatment of Alternative Tier 1 (“AT1”) financial instruments and to contribute this information to the development of the International Accounting Standards Board’s DRM model. The survey shows that for balance sheet classification under International Financial Reporting Standards, the majority of respondents classify their AT1s as equity; the majority of respondents include their AT1s for interest rate risk in the banking book (“IRRBB”) as equivalent to financial liabilities; and there is strong desire for the inclusion of AT1s in the current net open position. [NEW]
ISDA Publishes Updated Best Practices for Confirming Reference Obligations or Standard Reference Obligations. On September 25, ISDA published updated Best Practices for Single-name Credit Default Swaps regarding Reference Obligations or Standard Reference Obligations. The document sets out suggested best practices for confirming the Reference Obligation or Standard Reference Obligations for single-name Credit Default Swaps and is an update to the Best Practice Statement that was published by ISDA on November 18, 2014.
Joint Trade Association Issues Statement on EMIR 3.0 Effective Implementation Dates. On September 23, ISDA, the Alternative Investment Management Association, the European Banking Federation, the European Fund and Asset Management Association and FIA sent a letter urging the European Commission and European supervisory authorities to clarify that market participants are not required to implement the European Market Infrastructure Regulation (“EMIR 3.0”) Level 1 provisions prior to the date of application of the associated Level 2 regulatory technical standards (“RTS”). In the letter, the associations state that they are seeking clarification to avoid firms being required to implement the requirements of EMIR 3.0 twice—first, to comply with the Level 1 provisions once EMIR 3.0 enters into force and then when the associated Level 2 RTS becomes applicable.
ISDA Publishes Standing Settlement Instructions Suggested Operational Practices. On September 20, ISDA published the ISDA Standing Settlement Instructions (“SSI”) suggested operational practices (“SOP”), which outlines a set of guidelines for the communication, management and usage of SSIs. According to ISDA, the document aims at increasing standardization and efficiency in performing payments for over-the-counter (“OTC”) derivatives and it is an update to the Best Practice Statement that was published by ISDA on August 11, 2010. SOPs for the exchange of SSIs for the purposes of collateral are available in section 1.7 of the Suggested Operational Practices for the OTC Derivatives Collateral Process.
ISDA Publishes Results of DC Review Consultation. On September 19, ISDA published the results of a market-wide consultation on proposed changes to the structure and governance of the Credit Derivatives Determinations Committees (“DCs”). ISDA reported that the consultation indicated broad market support to implement many of the recommendations, including establishing a separate governance body, implementing certain transparency proposals relating to the publication of DC decisions and appointing up to three independent members of the DCs. Some of the proposals received a significant minority of objections.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Derivatives practice group, or the following practice leaders and authors:

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (212.351.3869, [email protected] )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

William R. Hallatt , Hong Kong (+852 2214 3836, [email protected] )

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki , New York (212.351.4028, [email protected] )

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

Derivatives, Legislative and Regulatory Weekly Update (October 4, 2024)

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