Derivatives, Legislative and Regulatory Weekly Update (March 21, 2025)

Client Alert | March 21, 2025

From the Derivatives Practice Group: The SEC’s Division of Corporation Finance released a statement on certain proof-of-work mining activities, on which Commissioner Crenshaw issued a cautionary statement.

New Developments

CFTC Staff Issues Interpretation Regarding Financial Reporting Requirements for Japanese Nonbank Swap Dealers. On March 20, the CFTC’s Market Participants Division issued an interpretation concerning financial reporting obligations for nonbank swap dealers subject to regulation by the Financial Services Agency of Japan (“Japanese nonbank SDs”). On July 18, 2024, the CFTC issued a comparability determination and related comparability order granting substituted compliance in connection with the CFTC’s capital and financial reporting requirements to Japanese nonbank SDs, subject to certain conditions in the order (“Japanese Comparability Order”). One of the conditions in the Japanese Comparability Order, condition 9, requires each Japanese nonbank SD to file a copy of its home regulator Annual Business Report with the CFTC and the National Futures Association (NFA). The staff interpretation clarifies that Japanese nonbank SDs may satisfy condition 9 of the Japanese Comparability Order by filing with the CFTC and the NFA certain enumerated schedules of the Annual Business Report (In Scope Schedules), subject to the translation, U.S. dollar conversion, and deadline requirements of condition 9. The interpretation was issued in response to a request from the Securities Industry and Financial Markets Association on behalf of its Japanese nonbank SD members that rely on the Japanese Comparability Order. [NEW]
SEC’s Division of Corporation Finance Releases Statement on Certain Proof-of-Work Mining Activities. On March 20, the SEC’s Division of Corporation Finance (“Corp Fin”) released a statement providing its views on certain activities on proof-of-work networks known as “mining.” Specifically, the statement addressed the mining of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network, and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network. Corp Fin said that participants in “Mining Activities” (as defined in the statement) do not need to register transactions with the SEC under the Securities Act or fall within one of the Securities Act’s exemptions from registration in connection with these Mining Activities. Commissioner Crenshaw released a related statement, noting that Corp Fin’s statement delivers “neither progress nor clarity” and suffers from issues of flawed logic and limited and imprecise application. Commissioner Crenshaw said that Corp Fin’s statement “leaves us exactly where we started,” because it does not obviate the need for a facts and circumstances application under the investment contract test set forth in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). [NEW]
CFTC’s Office of Customer Education and Outreach Releases New Advisory on Fraud Using Generative AI. On March 19, the CFTC’s Office of Customer Education and Outreach (the “OCEO”) released a customer advisory that says generative artificial intelligence is making it increasingly easier for fraudsters to create convincing scams. The OCEO advisory describes how fraudsters use AI to create fraudulent identifications with phony photos and videos that can appear very real if one is not familiar with the advances of AI technology. The fraudsters also are using AI to forge government or financial documents. An FBI public service announcement also warns the public about how criminals are using AI to commit fraud and how the technology is being used in relationship investment scams. [NEW]
CFTC Staff Withdraws Advisory on Swap Execution Facility Registration Requirement. On March 13, the CFTC Division of Market Oversight (“DMO”) announced it is withdrawing CFTC Letter No. 21-19, Staff Advisory Swap Execution Facility (“SEF”) Registration Requirement, effective immediately. As stated in the withdrawal letter, DMO determined to withdraw the advisory since it has created uncertainty regarding whether certain entities are required to register as SEFs.
Acting Chairman Caroline D. Pham Delivers Keynote Address at FIA BOCA50. On March 11, Acting Chairman Caroline D. Pham announced a new 30-day compliance and remediation initiative or enforcement sprint. This initiative involves review of the CFTC’s currently open investigations and enforcement matters regarding compliance violations, such as recordkeeping, reporting or other compliance violations without customer harm or market abuse. The CFTC will seek to expeditiously resolve these matters in the next 30 days to conserve the CFTC’s resources and free up Division of Enforcement staff to pursue fraudsters and scammers and seek recoveries for victims, whether through disgorgement, restitution, or other measures.
SEC Crypto Task Force to Host Roundtable on Security Status. On March 3, the SEC announced that its Crypto Task Force will host a series of roundtables to discuss key areas of interest in the regulation of crypto assets. The “Spring Sprint Toward Crypto Clarity” series will begin on March 21 with its inaugural roundtable, “How We Got Here and How We Get Out – Defining Security Status.” The SEC indicated that initial roundtable on March 21 is open to the public, will be held from 1 p.m. to 5 p.m. at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C and that the primary discussion will be streamed live on SEC.gov, and a recording will be posted at a later date. The SEC also noted that information regarding the agenda and roundtable speakers will be posted on the Crypto Task Force webpage.

New Developments Outside the U.S.

ESMA Extends the Tiering and Recognition of the Three UK-Based CCPs. On March 17, ESMA announced its decision to temporarily extend the application of the recognition decisions under Article 25 of the European Market Infrastructure Regulation (“EMIR”) for three central counterparties (“CCPs”) established in the United Kingdom (“UK”). On January 30, 2025, the European Commission adopted a new equivalence decision in respect of the regulatory framework applicable to CCPs in the UK. Subsequently, ESMA has prolonged the tiering determination decisions and recognition decisions for the three recognized UK CCPs – ICE Clear Europe Ltd, LCH Ltd (as Tier 2) and LME Clear Ltd (as Tier 1) – that were adopted by ESMA on September 25, 2020, to align with the expiry date of the new equivalence decision. The application of the tiering determination decisions and recognition decisions is temporarily extended until 30 June 2028. [NEW]
ESMA and Bank of England Conclude a Revised MoU in Respect of UK-Based CCPs Under EMIR. On March 17, ESMA and the Bank of England (“BoE”) signed a revised Memorandum of Understanding (“MoU”) on cooperation and information exchange concerning the three CCPs established in the UK (ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd) which have been recognized by ESMA under EMIR. ESMA said that, according to EMIR, one of the conditions for recognition of a third-country CCP (TC-CCP) by ESMA is the establishment of cooperation arrangements between ESMA and the relevant third-country authority. ESMA noted that the revised MoU follows the amendments introduced by EMIR 3 on the requirements concerning the content of such cooperation arrangements, in particular, cooperation in respect of systemically important TC-CCPs (Tier 2 TC-CCPs), and replaces the earlier version that ESMA and the BoE concluded in 2020. [NEW]
UK Drops Proposals to Publicize Enforcement Investigations if Public Interest Test is Met. On March 11, the UK Financial Conduct Authority (“FCA”) wrote to the Treasury Select Committee and House of Lords Financial Services Regulation Committee about its proposals to increase the transparency of enforcement investigations. The FCA indicated that, given continued industry concern over its proposals to publicize an investigation into a regulated firm carrying out authorized activity, where a public interest test is met, the FCA will not proceed with this. Instead, it will stick to its existing exceptional circumstances test to determine if it should publicize investigations into regulated firms. The FCA noted that it will take forward the following proposals and aim to publish a policy statement in the first half of this year: (i) Reactively confirming investigations announced by others; (ii) Public notifications that focus on the potentially unlawful activities of unregulated firms and regulated firms operating outside the regulatory perimeter; and (iii) Publishing greater detail of issues under investigation on an anonymous basis. ISDA said that the FCA’s proposal, which would have given it the ability to publicly name firms at the start of an investigation, caused concern across the industry. In their February 17 response to the proposal, ISDA and the Association for Financial Markets in Europe (“AFME”) highlighted concerns that the proposals would be harmful to UK competitiveness and growth and suggested a broader interpretation of the existing exceptional circumstances test could be used to meet the FCA’s objectives. This was the second consultation ISDA and AFME responded to on this subject. The first response, submitted on April 30, 2024, is available here. [NEW]
ESMA Clarifies the Treatment of Settlement Fails with Respect to the CSDR Penalty Mechanism. On March 14, ESMA published a statement on the treatment of settlement fails with respect to the Central Securities Depositories Regulation (“CSDR”) penalty mechanism, following the major incident that affected TARGET Services (T2S and T2) last month. ESMA clarifies in the statement that National Competent Authorities (“NCAs”) do not expect Central Securities Depositories to apply cash penalties in relation to settlement failures for the days of February 27 and 28, 2025. As specified in an existing CSDR Q&A, cash penalties should not be applied in situations where settlement cannot be performed for reasons that are independent from the involved participants. [NEW]
The ESAs Acknowledge the European Commission’s Amendments to the Technical Standard on Subcontracting Under the Digital Operational Resilience Act. On March 7, the European Supervisory Authorities (EBA, EIOPA and ESMA – the “ESAs”) issued an opinion on the European Commission’s (“EC”) rejection of the draft Regulatory Technical Standard (“RTS”) on subcontracting. The EC indicated that it rejected the original draft RTS on subcontracting, which specified further elements that financial entities must determine and assess when subcontracting ICT services that support critical or important functions under the Digital Operational Resilience Act (“DORA”), on the grounds that certain elements exceeded the powers given to the ESAs by DORA. The opinion acknowledges the assessment performed by the EC and opines that the amendments proposed ensure that the draft RTS is in line with the mandate set out under DORA. The ESAs said that, for this reason, they do not recommend further amendments to the RTS in addition to the ones proposed by the EC. The ESAs encouraged the EC to finalize the adoption of the RTS without further delay as submitted to the ESAs.

New Industry-Led Developments

IOSCO Launches New Alerts Portal to Help Combat Retail Investment Fraud. On March 20, IOSCO announced the launch of the International Securities & Commodities Alerts Network (“I-SCAN”). IOSCO said that I-SCAN is a unique global warning system where any investor, online platform provider, bank or institution can check if a suspicious activity has been flagged for a particular company by financial regulators, which will submit alerts directly to I-SCAN, worldwide. According to IOSCO, I-SCAN forms part of IOSCO’s Roadmap for Retail Investor Online Safety, an initiative which was launched in November last year. [NEW]
ISDA Expands SwapsInfo to Include European CDS Trading Activity. On March 13, ISDA announced that it has expanded its SwapsInfo derivatives database and website to include European credit default swaps (“CDS”) trading activity, creating a more comprehensive picture of derivatives trading in the EU, UK and US. The new data includes EU and UK index and single-name CDS traded notional and trade count, based on transactions publicly reported by 18 European approved publication arrangements and trading venues.
ISDA Submits Paper to ESMA on OTC Derivatives Identifier for MIFIR Transparency. On March 11, ISDA submitted a paper to ESMA setting out its view on how the delegated act specifying the identifying reference data to be used for over-the-counter (“OTC”) derivatives transparency under the Markets in Financial Instruments Regulation (“MIFIR”) should be implemented. The delegated act leaves room for interpretation by ESMA on which unique identifier should be used, creating a risk that the International Securities Identification Number may be retained in some form. The ISDA paper makes the case for the use of the unique product identifier (“UPI”), maintaining its position that this will create more effective transparency and a more attractive consolidated tape, as well as reducing cost and complexity, and aligning with the increasing international consensus on using the UPI as the basis for OTC derivatives identification.

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, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus, New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt, Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki, New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

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 (March 21, 2025)

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