Switzerland: Derivative Trading Under The Federal Act On Financial Markets Infrastructure

I. Introduction

1. From Pittsburgh to Bern via Basel, Brussels and Washington

On 1 January 2016, the Federal Act on Financial Markets Infrastructure of 19 June 2015¹ will enter into force.² This will be a major milestone on the road from the financial crisis of 2007–2008 to a new architecture for the regula­tion of Swiss financial markets.³ Indeed, to understand the FMIA, it is necessary to look back at the bankrupt­cy of Lehman Brothers and its aftermath: in the wake of the financial crisis of 2007–2008, regulators came to real­ize that the over-the-counter (OTC) derivatives markets had grown to immense proportions out of their sight. The leaders of the G-20 Member States met in Pittsburgh. Among their high hopes for a new global regulation of fi­nancial markets, they agreed that, in order to prevent fu­ture crises measures should be taken to improve the OTC derivatives markets. More specifically, they agreed that:

The leaders' statement implies four objectives:

• a requirement to trade certain standardized OTC derivatives on a stock exchange or an electronic plat­form to ensure post- and, possibly, even pre-trade transparency for the whole market and ensure a more open price-setting process;
• a requirement to clear certain standardized OTC de­rivatives through a central counterparty (CCP) to re­duce operational and counterparty risk by relying on the centeralized risk management system offered by a clearing house;
• to report trades to a trade repository to ensure that regulators have a granular yet global view of the mar­ket; and
• to impose higher capital requirements for non-cen­trally cleared derivatives.

Following this statement, the Toronto G-20 Summit add­ed to these objectives a fifth pillar: the requirement to mitigate the risks of non-centrally cleared OTC derivatives to ensure that, even if the main objectives are not achieved, measures will be in place to avoid such risks.⁵

Following the G-20 Leaders' statement in Cannes in No­vember 2011, the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the International Organization for Securities Commissions (IOSCO) and other international standard setters were called into action⁶ and have kept busy since then.⁷

At the national level, the United States passed into law the Dodd-Frank Act of 2009,⁸ the in the United States and the European Union adopted EMIR⁹ and CSDR,¹⁰ as well as MiFID II¹¹/MiFIR.¹² Both sets of regulations provide for extensive rules relating to counterparties from foreign/ non-member states.¹³ Therefore, Switzerland needed to follow suit if not out of sense of belonging to the interna­tional community, at least in order to maintain its access to foreign markets.¹⁴

The FMIA emerged against this backdrop. It is as a key legislation for Switzerland's international financial policy. Its main objective will be, for Switzerland, to be recog­nized as having an equivalent regulation under article 13 (2) EMIR. For this reason, after an initial period of inac­tivity,¹⁵ the government made it a priority to adopt rules on derivatives trading. Once the regulatory machine got started, the FMIA was marshalled through the legislative process with a consultation process initiated in December 2013,¹⁶ a bill presented to parliament in September 2014¹⁷ and the final act passed into law on 19 June 2015.¹⁸ The government maintained the pace to adopt the implement­ing regulations: a consultation period was open from 20 August 2015 until 2 October 2015.¹⁹ The final version of the Ordinance on Financial Markets Infrastructure (FMIO) was published on 25 November 2015.²⁰

2. An Overview of the FMIA

The FMIA has a broader scope than derivatives trading. It is part of the reform of the regulatory architecture mov­ing away from the current pillar system to a new system based on sector-specific regulations that applies to the en­tire financial sector, with the Federal Act on the Financial Markets Supervisory Authority of 22 June 2007 (FIN­MASA)²¹ governing the supervision of financial markets and institutions, the FMIA creating a regulatory frame­ work to ensure that markets operate properly by regulat­ing the conduct of market participants, the future FinSA regulating financial services and products, and the future FinIA on financial institutions.²²

In this context, the FMIA aims to ensure functioning and transparent securities and derivatives markets as well as the stability of the financial system.²³ It also seeks to pro­tect investors and ensure that they are treated equally.²⁴ To achieve these goals, the FMIA creates a systematic regula­tory framework for the prudential supervision of market infrastructures,²⁵ a broad concept encompassing stock ex­changes, multilateral trading venues and organized trading venues, central depositories, central counterparties, pay­ment systems and trade repositories.²⁶ The FMIA was also the opportunity to revise the insolvency regime to protect the porting of derivative trades from insolvency and to ensure a better protection of the private enforcement and netting.²⁷ In parallel, it extended the scope of FINMA's in­solvency jurisdiction to non-regulated holding companies and service companies.²⁸ The FMIA further reinforced FINMA's powers to issue a resolution stay pursuant to article 30a of the Banking Act to all contracts,²⁹ which in line with other initiatives will need to also be implement­ed through contractual arrangements,³⁰ such as the ISDA 2014 Resolution Protocol.³¹

Moreover, the FMIA consolidates in a single act the cur­rent rules on the disclosure of substantial shareholdings,³² takeovers,³³ and market abuse.³⁴ Finally, it also amends other acts, including a far-reaching revision of the rules on international assistance in administrative matters.³⁵

Nevertheless, the rules on derivative trading will, without contest, have the largest impact on market participants. Following the leader's statement of the Pittsburgh and To­ronto G-20 summits,³⁶ the FMIA provides for four duties in connection with derivatives trading:³⁷

• clearing requirements: certain designated OTC de­rivatives will have to be cleared through a licensed or recognize CCP;³⁸
• reporting obligations for derivatives: OTC and ex­change traded derivatives will have to be reported to an authorized or recognized trade repository;³⁹
• risk-mitigation obligations: OTC derivatives that are not cleared through a CCP will be subject to risk mitigation obligations to limit operational and coun­terparty risks: these measures include timely confir­mation, portfolio reconciliation, portfolio compres­sion, mark-to-market valuation and margining;⁴⁰ and
• platform trading requirement: certain designated derivatives will have to be traded on a stock exchange or a trading platform.⁴¹

Another requirement regarding position limits⁴² was added in during the legislative process to put in place en­abling legislation to follow suit with the implementation of MiFID II in the EU.⁴³ It allows the Federal Council to impose position limits for commodities derivatives in line with international standards.⁴⁴

All these obligations are subject to an extensive phas­ing-in which in some cases will last until 2020. This pro­cess should allow the creation of the necessary infrastruc­ture to comply with these requirements and allow market participants to prepare themselves for meeting these ob­ligations.⁴⁵ Moreover, these last two duties, the platform trading requirement and the position limits, however, will probably not enter into force before an international consensus emerges on their implementation, which is not likely until 2017 at the earliest.⁴⁶ This led Peter Nobel to dub FMIA legislation in reserve (Gesetzgebung auf Vorrat).⁴⁷

Following this outline, the remainder of this article will focus on the rules on derivatives trading. After starting with their scope including cross-border issues in section II, it will examine the three duties which are due to be implemented in the near future, namely the clearing ob­ligation (section III), the reporting obligation (section IV) and the risk mitigation requirement (section V, without considering any further the platform trading obligation or position limits). Finally, we will consider the compliance and enforcement mechanism contemplated by the FMIA (Section VI).

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Footnotes

^{1 Federal Act on Financial Market Infrastructures and Market Con­duct in Securities and Derivatives Trading of 19 June 2015, BBl. 2015 4931.}

^{2 Federal Department of Finance, «Federal Council brings Fi­nancial Market Infrastructure Act into force as at 1 January 2016», Press release of 25 November 2015, https://www.efd.admin.ch/efd/en/home/dokumentation/nsb-news_list.msg-id-59647.html.}

^{3 See, e.g., Daniel Roth, Gesetzgebungsprojekt: FIDLEG, FINIG und FinfraG, SZW 2014, 608, p. 608.}

^{4 Leaders' Statement, The Pittsburgh Summit, September 24–25, 2009, N 13, p. 9, https://www.treasury.gov/resource-center/inter­national/g7-g20/Pages/g20.aspx.}

^{5 Leaders Statement, G-20 Toronto Summit Declaration, 26–27 June 2010, N 25, available at https://www.treasury.gov/resource-center/ international/g7-g20/Pages/g20.aspx.}

^{6 Leaders Statement, G-20 Cannes Summit Final Declaration, N 24, p. 5 available at https://g20.org/wp-content/uploads/2014/12/Dec laration_eng_Cannes.pdf.}

^{7 For an overview of the current status, see Financial Stability Board, OTC Derivatives Market Reforms: Tenth Progress Report on Implementation, 4 November 2015, available at www.financialstabilityboard.org. See also Hans Kuhn, Die Regulierung des De­rivathandels im künftigen Finanzmarktinfrastrukturgesetz, GesKR 2014, 161, p. 162.}

^{8 Dodd-Frank Act Wall Street Reform and Consumer Protection Act, Public Law 111-203, H.R. 4173.}

^{9 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterpar­ties and trade repositories, Official Journal of the European Union, L 201/1 of 27 July 2012.}

^{10 Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012, Official Journal of the European Union, L 257/1 of 28 August 2014.}

^{11 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, Offi­cial Journal of the European Union, L 173/349 of 12 June 2014.}

^{12 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 Official Journal of the Eu­ropean Union, L173/84 of 12 June 2014.}

^{13 See, e.g., art. 13 (2) EMIR on the equivalence procedure for the rules on derivatives.}

^{14 See Kuhn (n. 7), p. 161.}

^{15 See ibid, p.165.}

^{16 Federal Department of Finance, «Federal Council launches consultation on Financial Market Infrastructure Act», Press release of 13 December 2013, https://www.news.admin.ch/message/index.html?lang=en&msg-id=51372.}

^{17 See Botschaft zum Finanzmarktinfrastrukturgesetz (FinfraG) vom 3. September 2014, BBl 2014 7483 (Botschaft FinfraG).}

^{18 BBl. 2015 4931.}

^{19 Federal Department of Finance, «Hearing on Financial Market Infrastructure Ordinance», Press release of 20 August 2015, availa­ble at https://www.admin.ch/gov/en/start/documentation/media-re leases.msg-id-58394.html.}

^{20 Federal Department of Finance, «Federal Council brings Fi­nancial Market Infrastructure Act into force as at 1 January 2016», Press release of 25 November 2015, https://www.efd.admin.ch/efd/en/home/dokumentation/nsb-news_list.msg-id-59647.html.}

^{21 SR 956.1.}

^{22 See, e.g., René Bösch/Stefan Kramer, Schweizer Finanzmarkt­recht im Umbruch – Das Finanzmarktinfrastrukturgesetz als eine der neuen Säulen, SJZ 110/2014, p. 250; Roth (n. 3), p. 609.}

^{23 Art. 1 (2) FMIA.}

^{24 Art. 1 (2) FMIA.}

^{25 See 2nd Title of the FMIA (art. 4 to 92 FMIA). For an overview, see generally, Rashid Bahar/Roland Truffer, Regulation of Finan­cial Market Infrastructures under the preliminary draft for a Finan­cial Market Infrastructure Act, Caplaw 2014-13; Bösch/Kramer (n. 22), p. 253–254; Roth (n. 3), p. 609–610.}

^{26 Art. 2 (a) FMIA.}

^{27 Art. 90 and 91 FMIA; art. 27 Federal Act on Banks and Saving In­stitutions of 8 November 1934 (Banking Act, BankA, SR 952.0), as amended by the FMIA; art. 110 (3) FMIA.}

^{28 Art. 2bis BankA (as amended by the FMIA).}

^{29 See also art. 92 FMIA.}

^{30 Art. 12 (2bis) Ordinance on Banks and Saving Institutions of 30 April 2014 (BankO, SR 952.02) (as amended by the FMIO).}

^{31 http://assets.isda.org/media/f253b540-25/958e4aed.pdf. See, gene­rally, Reto Schiltknecht/David Billeter, Ergänzung des ISDA-Rahmenvertrages um ein Protokoll zur Vermeidung möglicher De­stabilisierung des Finanzsystems, SZW 2015, 108 ff..}

^{32 Art. 120–124 FMIA.}

^{33 Art. 125–141 FMIA.}

^{34 Art. 142–143 FMIA.}

^{35 Art. 42 FINMASA as amended by the FMIA. See, generally, Urs Zulauf, Kooperation oder Obstruktion? – 20 Jahre Amtshilfe im Finanzmarktrecht vom Börsengesetz zum FINFRAG, GesKR 2015, 336.}

^{36 See above Section I.1.}

^{37 The goal to impose higher capital requirements on OTC deriva­tives did not need to be addressed through the FMIA. Banks and securities dealers are already subject to the Ordinance on Capital Adequacy of 1 June 2012, Capital Adequacy Ordinance, CAO, SR 952.03 and insurance companies to art. 21 ff. of the Ordinance on the Supervision of Insurances of 9 November 2005, Supervisory Ordinance, OSI, SR 961.01. Botschaft FinfraG, BBl. 2014 7575.}

^{38 Art. 97–103 FMIA.}

^{39 Art. 104–106 FMIA.}

^{40 Art. 107–111 FMIA.}

^{41 Art. 112–115 FMIA.}

^{42 Art. 118–119 FMIA.}

^{43 See also Grenzen für Spekulanten: FinfraG im Ständerat, NZZ 2.6.2015, available at http://www.nzz.ch/wirtschaft/grenzen-fuer-spekulanten-1.18553915.}

^{44 Art. 118–119 FMIA.}

^{45 See also Erläuterungsbericht zur Verordnung über die Finanzmarktinfrastrukturen und das Marktverhalten im Effekten- und Derivatehandel, 25 November 2015 (Erläuterungsbericht FinfraV), p. 39 (on the clearing requirement), p. 46 (on the risk-mitigation re­quirement), p. 53 (reporting requirement) and p. 54 (risk-mitigation obligations).}

^{46 Art. 164 (3) FMIA regarding the platform trading requirement. See also Erläuterungsbericht FinfraV (n. 45), p. 50. See, regarding the platform trading requirement, Erläuterungsbericht Finanzmarktin­frastrukturverordnung-FINMA, 20 August 2015 (Erläuterungsbe­richt FinfraV-FINMA), p. 23; Bösch/Krammer (n. 22), p. 256.}

^{47 Peter Nobel, Finanzmarktrecht: Neue Architektur – Neuer Wein?, BJM 2015, 129.}

Previously published in GesKR 4/2015

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