We are supportive of the efforts to achieve closer co-operation and harmonisation of regulatory approaches in key derivatives markets. In particular, setting a broader objective focussed on comparability and outcomes, rather than strict equivalence, will be welcomed by many.
There is still a long way to go to see how this will work in practice, particularly in the context of short-term differences in implementation timetables.
Implications for firms
For trades which touch multiple jurisdictions, the ground work is laid for significantly enhanced cooperation between supervisors, which could mitigate the threat of duplicative or conflicting requirements for similar (or even the same) trade.
Proposals, in particular, to recognise comparability of a jurisdiction as a whole – rather than requiring firm by firm application as originally proposed by the CFTC – will be welcome. It is unclear how these rules will work in practice – particularly the scope for registration and entity level requirements for third country institutions over and above specific transaction requirements.
In the detail…
Understanding on clearing determinations
The regulators agreed to consult with each other prior to making any final determinations regarding which products would be subject to mandatory clearing. They further committed that once one regulator decided to subject certain products or classes of products to the clearing requirement, each would consider whether a similar designation was appropriate in their respective jurisdictions.
The CFTC issued a clearing determination for certain classes of Credit Default Swaps (CDS) and Interest Rate Swaps (IRS) on 28 November 2012, well ahead of likely clearing determinations in other jurisdictions. Additionally, the US treasury has confirmed that FX swaps and forwards will be out of scope for US clearing requirements – though international policymakers are also expected to propose a similar exemption – so at least in the short term differences will remain.
Sharing of information and supervisory and enforcement cooperation
The regulators agreed that cooperating on supervision and enforcement would facilitate effective coordination of regulatory regimes across jurisdictions. They therefore agreed that to ensure effective supervision and oversight of cross-border market participants, supervisory authorities should either enter into supervisory cooperation arrangements or bilateral enforcement arrangements.
Timing
Recognising previous G20 commitments on timing – and that the differences in implementation dates may create gaps in regulations and uncertainty in cross-border application – the regulators committed to a speedy renewal of efforts to implement OTC derivatives reforms in an expeditious manner.
Wherever possible, the regulators affirmed the need for clarity in the scope of market participants subject to cross-border regulatory requirements. They stated that facilitating the implementation of cross-border regulatory requirements could be achieved through appropriate transition periods for entities in jurisdictions that are implementing comparable regulations.
Exploring the scope of regulation and recognition
Different approaches were discussed to prevent or minimize the application of conflicting, inconsistent or duplicative rules. The regulators agreed to consider the following approaches to achieve this aim:
- Recognition – where a regulator decides that an entity has 'substantially' met some or all of its regulatory requirements, if it determines that the entity is already subject to comparable or equivalent regulation or oversight.
- Registration and Substituted Compliance – Where a regulator requires market participants to register with it, it could permit the use of substituted compliance as part of that registration process.
- Transactions and Substituted Compliance – a regulator could allow for compliance with foreign regulations in place of otherwise applicable transaction-level requirements.
- Registration Categories and Exemptions – Where a regulator requires market participants to register with it, the authority may allow for flexibility in oversight for entities subject to comparable oversight under a different regime. This could be achieved by defining different registration requirements, or defining the same registration requirements in different ways. After considering an entity's existing regulatory obligations, a supervisor might also elect to exempt certain market participants from its regulatory requirements.
An important development for market participants (given the CFTC's proposed cross-border guidance) is the agreement by the regulators that the above approaches would not be undertaken on a firm-by-firm basis, but rather will focus on the applicable regime in a jurisdiction.
Next steps
The regulators committed to meet and consult regularly – agreeing to meet again early in 2013. Future meetings would address:
- Options to address identified conflicts, inconsistencies and duplicative rules
- Options when considering the comparability of regulatory regimes and cross-border supervision
- Updates on the timing and sequencing of rule finalisations, including possible transition periods