Europe should consult on Emir equivalency – SEC official

European authorities should consult on their approach to determining whether foreign derivatives regimes are equivalent to the European Market Infrastructure Regulation (Emir) because these decisions have the power to break up the over-the-counter derivatives clearing system, according to Eric Pan, associate director in the office of international affairs at the US Securities and Exchange Commission (SEC).

The European Securities and Markets Authority (Esma) is currently preparing technical advice for the European Commission (EC) on whether the US and Japanese regulatory regimes are equivalent to Emir, expected to be delivered on June 15. Advice on the regimes in Australia, Dubai, Hong Kong, India, Singapore and Switzerland is scheduled to follow on July 15.

Ultimately, this advice will determine – among other things – whether central counterparties (CCPs) in those jurisdictions will be able to clear trades for European derivatives users. As it stands, there is no registration mechanism within Emir for CCPs based in non-equivalent countries, and this all-or-nothing approach is worrying foreign clearing houses and regulators, including the SEC.

“We are all resource-constrained as regulators and – as talented and intelligent as the people at Esma and the EC are – it is an incredibly difficult task. In the US, the normal way of approaching a problem like this is to solicit public comment – you welcome the public, market participants and other interested parties to come in and take a look at what you’ve done and indicate where you may have got certain things wrong or suggest where you can do things better. We would encourage the EC and Esma also to adopt this practice,” said Pan, speaking at an industry briefing organised by the Futures and Options Association in London today.

There is currently little clarity on how the EC and Esma will make these determinations, he added – specifically, whether the regulators will adopt a rule-by-rule comparison or look more broadly at whether the regulations are pursuing similar objectives. The former could be problematic given the significant differences in CCP registration and risk management requirements between the Dodd-Frank Act and Emir, said Pan – and a determination of non-equivalence would have serious consequences.

“I think we need to keep in mind what is at stake. So taking the case of CCP equivalence, if the EC decides that the US regime or a regime in Asia is non-equivalent in the case of CCP regulation, you today have a multi-trillion-dollar CCP system where trillions of dollars worth of credit default swaps are currently being cleared in Europe and the US and the cross-border market does work. If there is a non-equivalence decision, then the immediate implication will be a breaking-up of this clearing system,” he said.

The proposed regime in the US is a little different and does not have all-or-nothing consequences, said Brian Bussey, associate director for derivatives policy in the division of trading and markets at the SEC. The agency published its proposed cross-border rules for the application of Dodd-Frank rules for security-based swaps on May 1, which included the concept of substituted compliance – a term introduced by the Commodity Futures Trading Commission (CFTC) in its own cross-border guidance published last July. Both agencies plan to allow market participants to apply foreign regulatory requirements in certain circumstances, as long as the local rules are comparable to Dodd-Frank. Unlike the CFTC, the SEC will base that comparison on outcomes rather than a rule-by-rule comparison of the regulations.

A similar mechanism is contained in its rules for foreign CCP registration. If the SEC determines a clearing house is subject to comparable, comprehensive supervision and regulation by its home regulator, then there is no need to register with the SEC. The agency does not specify how this determination will be made, but Bussey said the worst-case outcome would be a continuation of current practice – the registration of the CCP in both home and host jurisdictions.

“We are not doing all or none in a particular area. We are giving ourselves flexibility so we are not in a box a year down the line. A non-substituted compliance decision for CCPs on our side will not result in any kind of dramatic consequences. So Ice Clear Europe is a global clearing house with all G-16 banks as members. It is regulated by the Bank of England. It is registered with the CFTC, and it is registered with us. That is the status quo today. So we don’t prevent Ice Clear Europe from operating in the US if we don’t make substituted compliance,” he said.

During a question and answer session, conducted under the Chatham House rule, another participant expressed hope European regulators would conduct its determinations with an eye on the continued functioning of the derivatives market.

“We in Europe have work to do – first of all, the EC has work to do on its equivalence determinations. I think we hope they can be made in the context and in the spirit of a global negotiation with the aim of reaching a solution that allows global derivatives markets to continue to function. I think the EC is committed to that,” the participant said.


This article was first published on Risk

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