Equivalence through deference
Yesterday the European Commission (the Commission) adopted four provisional implementing acts with the effect that CCPs in Australia, Hong Kong, Japan and Singapore will soon be able to be used by market participants to clear standardised OTC derivatives in compliance with EU legislation.
In other words, these so-called “equivalence” decisions mean that by submitting a trade for clearing to an approved CCP in Australia, Hong Kong, Singapore or Japan, a market participant can satisfy the clearing obligation under EMIR, if such trade is mandatorily clearable in the EU1.
These implementing acts are the first, and long-awaited, result of interaction between the Commission and the European Securities and Markets Authorities (ESMA), the Commission having mandated ESMA in 2012 to provide it with technical input on the equivalence between certain non-EU countries’ regulatory regimes and aspects of the EU regulatory regime under EMIR. The implementing acts will come into force 20 days from their publication in the Official Journal of the European Union.
The idea behind bringing in these equivalence implementations is to create a seamless international regulatory framework, to stabilise the international derivatives market by lessening the chance of market fragmentation and any possible regulatory arbitrage between countries. Such a philosophy was agreed by the G20, who in September 2013 agreed that “jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulatory and enforcement regimes”2.
Commission Vice-President, Michael Barnier echoed this sentiment, stating that “[the 30 October decisions] show that the EU is willing to defer to the regulatory frameworks of third countries [i.e. non-EU countries], if they meet the same objectives as EU rules”. Further, Mr Barnier added that the Commission “are in close and continued dialogue with [its] colleagues at both the SEC and CFTC as [it] develop[s] [its] assessments of their respective regimes and discuss their approaches to deference”.
How it will work in practice
To benefit from such equivalence provisions, the CCP from a third country must seek recognition from ESMA3. Assessments of equivalence are carried out in line with the outcome-based approach, also lauded by the G20 in September 2013. This means that the third country regulatory regime must satisfy the same objectives as that in the EU, to provide a strong CCP framework that reduces systemic risk and thus engenders financial stability.
The use of this outcome-based approach also means that there is no requirement for identical rules to be in place, and also means that any assessment will necessarily require input from the regulators in the relevant third country. On completion of the assessment, and where a determination of equivalence is made, an implementing act (in line with those set out for the four countries at the head of this eBulletin) will give equivalent status in accordance with Article 25(6) EMIR. At this point, a market participant will be able to satisfy its mandatory clearing obligations under EMIR by submitting a trade with an authorised CCP in that third country.
As of yet, provisional implementing acts have only been announced in relation to Hong Kong, Australia, Singapore and Japan. Whilst this is indeed a big development, it raises the exciting prospect (given further credence by Mr Barnier’s comments) that other countries, in particular the US will soon follow. These developments will, we imagine, be followed closely by most market participants who will be keen to resolve the potential issue of being subject to both EMIR and Dodd-Frank clearing regimes. For the time being however, we will just have to await the results of the “close and continued dialogue” between the Commission and its US counterparts.
1 The CCPs whose application for recognition in the EU brought about these acts are: ASX Clear (Futures) Pty Ltd. and ASX Clear Pty Limited in Australia, Hong Kong Securities Clearing Company Ltd., OTC Clearing Hong Kong Limited, HKFE Clearing Corporation Limited and The SEHK Options Clearing House Limited in Hong Kong, Japan Commodity Clearing House Co., Japan Securities Clearing Corporation and Tokyo Financial Exchange, Inc. in Japan and Singapore Exchange Derivatives Clearing Limited and The Central Depository (Pte) Limited in Singapore. Financial Stability Board 18 September 2014 report to G20 Finance Ministers and Central Bank Governors. http://www.financialstabilityboard.org/publications/r_140918.pdf
2 Financial Stability Board 18 September 2014 report to G20 Finance Ministers and Central Bank Governors. http://www.financialstabilityboard.org/publications/r_140918.pdf
3 CCPs from the following non-EU countries have also applied for recognition from ESMA under Article 25(6) EMIR: USA, Canada, Mexico, Brazil, Malaysia, Dubai, India, Korea, Israel, New Zealand, Switzerland and South Africa.