Fulfillment of the Duties in Derivatives Trading under Foreign Law
Although the Financial Market Infrastructure Act (FMIA) entered into force on 1 January 2016, the duties in derivatives trading that it sets out do not yet have to be met due to transitional periods. The postponed entry into force of the European regulatory reform of the financial markets, MIFID II, causes a further extension of the transitional periods in Switzerland. Nevertheless, the Swiss financial market participants affected by the new regulation should already start with the implementation of the prescribed duties and procedures.
In implementing, international companies are confronted with substantial difficulties resulting from differences between FMIA and MIFID II. Complying with different regulations simultaneously leads to significant additional expenditure for the companies concerned. In general, the question arises as to whether the FMIA provisions and applicable foreign regulation must be met at the same time or whether it suffices if only the duties under foreign law are fulfilled.
Regulations according to FMIA and FMIO The FMIA and the Financial Market Infrastructure Ordinance (FMIO) provide that the duties in derivatives trading are considered as being fulfilled, if they are met according to a foreign statutory law that has been recognized by FINMA as equivalent. Except for the risk mitigation measures, in addition, all these other duties under the equivalent foreign statutory law have to be fulfilled by using a foreign financial market infrastructure recognized by FINMA.
Under the current regulation Swiss counterparties can fulfill their duties, in particular Swiss domestic market businesses (i.e. businesses between two Swiss counterparties), under a foreign supervisory legislation that has been recognized as equivalent by FINMA, if the derivatives transaction in question or a counterparty to this transaction has an objective connection with that legislation.
Objective Connection with Foreign Legislation It is currently unclear what exactly will qualify as such an objective connection. However, it is undisputed that a choice of law does not create a sufficient objective connection. Therefore, the parties cannot determine the applicable law at their discretion and, for example, decide that their business is governed under a liberal foreign legislation. In our opinion, a sufficient objective connection may, inter alia, exist in the following cases:
where a derivative business is concluded between two parties, whereof at least one party is part of an international group;
where a derivative business concerns an underlying which shows predominant connections to a particular foreign law.
The Foreign Law's Subject Matter In any case, the Swiss FMIA determines which duties have to be met by which counterparty. The foreign law then provides how exactly the particular duty has to be fulfilled by the relevant counterparty.