It’s a clash of the regulatory titans. News about international regulators’ efforts to implement swap rules has focused on the unwillingness of European regulators to recognize US clearing firms, and US regulators’ unwillingness to declare European Commission (EC) regulations equivalent. The standoff has created a lot of extra compliance work for market participants. Put in perspective, though, there’s been significant progress.
A November report to G20 leaders by the OTC Derivatives Regulators Group (ODRG), comprising principals of the major over-the-counter derivatives regulators, acknowledges those differences but views the overall process from the perspective of a glass half full.
Called “Report of the OTC Derivatives Regulators Group to G20 Leaders on Cross-Border Implementation Issues,” the report “seeks to tilt the narrative a bit,” said Luke Zubrod, director of risk and regulatory advisory at Chatham Financial.
Mr. Zubrod acknowledged that it’s unlikely the current conflict between the U.S and EC will be resolved until the regulators recognize each other’s regulatory regimes in areas such a clearing. Nevertheless, the report identifies several areas of agreement where progress has been made.
A year ago the ODRG introduced G20 leaders to a set of understandings reached by the ODRG principals on cross-border issues related to cross-border derivatives reforms, seeking to resolve remaining conflicts. The current report identifies cross-border issues the ODRG has addressed or plans to address. For example, the report notes discussions the ODRG has had about how to treat guaranteed affiliates and the related issues it has identified, and proceeds to describe the different approaches it’s considering.
The report similarly addresses the issues of organized trading deference. It then provides and update progress on four areas in which ODRG members had previously reached understandings, but which remained ongoing in terms of implementation: equivalence and substituted compliance; clearing determinations; risk mitigation techniques for non-centrally cleared derivative transactions; and data in trade repositories and barriers to reporting to trade repositories.
Equivalence and substituted compliance, the issue at the crux of the conflict between the EC and US, is covered at length by the report, which notes “significant bilateral progress between jurisdictions on substituted compliance and equivalence assessments.” That includes recently adopted determinations by the EC for Australia, Hong Kong, Singapore and Japan with respect to central counterparty requirements. Additionally, it says, the EC is now reviewing eight other jurisdictions, and the report notes several other bilateral agreements.
“The report increases the nuance and the understanding and character of what cross-border negotiations are resulting in and how governments are collaborating and working toward agreements,” Mr. Zubrod said. “What they’re saying is that recognizing each other’s clearing houses isn’t the only game in town. Even while some of these bigger negotiations are happening, there’s still cooperation on other matters.”
Timothy Massad started as CFTC Chairman in June, replacing Gary Gensler who had strongly advocated for tough swap related rules. Massad appeared to support greater cross-border cooperation in terms of reaching agreements on issues such as substitutive compliance, where non-US market participants needn’t comply with US rules when appropriate and instead comply with rules in their own jurisdiction.
Nevertheless, negotiations between US and EC regulators to recognize each other’s clearing rules as equivalent have been held up for months and have yet to reach a breakthrough.
“Even though the EC has approved other jurisdictions, it has held up approval of US clearing houses, because it’s trying to get the US to recognize Europe’s clearinghouses,” Mr. Zubrod said.
He added that the report highlights just how “extraordinarily complicated” the area of cross-border negotiations is. Regulators are not just looking at each other’s rule regimes to determine whether they’re comparable, but assessing the comparability at the granular rule level, and across multiple jurisdictions.
To some degree, US regulators using this a stick to push other jurisdictions to adopt sufficiently stringent rules. In the meantime, market participants, including corporates, must consider their locations and their banks’ to determine just which rules to follow.
“Corporates must ask themselves whether they have to carry out any requirements duplicatively in multiple jurisdictions, because there’s not yet recognition of rules being equivalent,” Mr. Zubrod said.