The European Securities and Market Authority (ESMA) assessment of global regulatory differences in regard to post-crash derivatives trading has been published. Its advice paper for the European Commission (EC) looks at the equivalence of the regulatory regimes for over-the-counter (OTC) derivatives clearing, central counterparties (CCPs), and trade repositories (TR) of non-European Union (EU) countries, and compares the rules with its own European Markets Infrastructure Regulation (EMIR).
ESMA has examined the equivalence of the regulatory regimes in Australia, Hong Kong, Japan, Singapore, Switzerland and the US - where Dodd Frank is introducing the required rules agreed at the post-crash Pittsburgh G20 meeting in the same way as EMIR is in the EU. The third-country rules were compared with the EMIR requirements to check if the desired global standardised approach is possible for central clearing, reporting, CCPs, TRs and non-financial counterparties, as well as common risk mitigation techniques for uncleared trades. The fear is that regulatory arbitrage will take hold otherwise and the desired common global rules won’t materialise.
ESMA Promotes Conditional Equivalence
After its investigation ESMA considers third-country regimes equivalent where the legal provisions and the level of supervision and enforcement is similar to that of EMIR. The European body finds the regulatory regimes of Australia and Switzerland for CCPs equivalent to EU rules. Conditional equivalence is proposed to the following regimes, where some regional differences were identifed:
• Hong Kong, Japan, Singapore, and the US for CCPs.
• The US and Japan for central clearing, requirements for non-financial counterparties and risk mitigation techniques for uncleared trades.
• The US for TRs.
The EC is expected to use ESMA’s technical advice to prepare possible equivalence decisions. Where it adopts such a decision, certain provisions of EMIR may be disapplied in favour of equivalent third-country rules and, depending on the specific area determined to be equivalent, ESMA may:
• Recognise within the EU a CCP which is authorised outside the EU.
• Recognise within the EU a TR which is authorised outside the EU.
ESMA’s advice is based on a factual assessment of the rules of each jurisdiction but has also taken into account possible consequences for the stability and protection of EU entities and investors that an equivalence decision would have. ESMA’s advice has also considered upcoming regulations in several jurisdictions that may impact the equivalence assessment.
For Australia, Canada, Hong Kong, India, Singapore, South Korea and Switzerland, ESMA will be delivering its advice on areas not yet covered by 1 October 2013. CCPs from third-countries that want to continue to be offering clearing services directly to EU clearing members will have to apply for ESMA recognition by 15 September 2013.