29 May, 2015
The European Commission has adopted “equivalence” decisions on the derivatives regulatory regimes for central counterparties in Australia, Hong Kong, Japan and Singapore. Further decisions are awaited for other jurisdictions and for other derivatives regulatory requirements. This article summarises the equivalence decisions and technical advice that has been produced to date.
Equivalence
Under the European Market Infrastructure Regulation (“EMIR”),1 the European Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a non-EU country are equivalent to the requirements in EMIR. Such a decision is necessary for a central counterparty (“CCP”) or trade repository (“TR”) established in a non-EU country to provide their services in the EU. EMIR also requires equivalence decisions to be issued in respect of other obligations. These are relevant in circumstances where one of the counterparties to a trade subject to EMIR is established outside the EU, as an equivalence decision would permit both counterparties to comply with the non-EU country’s equivalent regime instead.
EMIR requires the European Securities and Markets Authority (“ESMA”) to provide technical advice to the European Commission as to the equivalence of some non-EU jurisdictions which host major derivatives markets or CCPs which have applied for recognition. ESMA’s assessment is a factual comparison of the rules in the relevant jurisdiction with the EU rules and advice to the Commission on how any differences might affect an equivalence decision or could be incorporated into an equivalence decision. The scope of the advice covers the recognition of non-EU CCPs and TRs, the clearing obligation, reporting obligation, non-financial counterparties (“NFCs”), portfolio reconciliation, dispute resolution, portfolio compression and margin requirements.
The Commission’s equivalence decision will be based on ESMA’s advice and an assessment of the outcomes of the third country’s rules, including whether the rules mitigate any risks faced by market participants in the EU to the same extent that the EMIR rules are intended to do so. The trading volumes in a jurisdiction can be relevant to an assessment of the risks posed to clearing members of a third country CCP. Those CCPs with larger trading volumes operating in larger financial markets will need to be subject to more rigorous risk mitigation requirements than those operating in smaller financial markets.
In September and October 2013, ESMA published its technical advice to the European Commission on the equivalence to the EU rules of the derivatives frameworks in several countries, including the US, Australia, Hong Kong and Japan. In certain cases, where the frameworks were still being finalised, ESMA was unable to advise fully on equivalence. Advice on the regimes for CCPs has also been provided for Hong Kong, Singapore, Switzerland, India and South Korea and on the regimes for TRs for Singapore. Advice relating to Dubai has been postponed.
Implementing Decisions for Australia, Hong Kong, Japan and Singapore were published in October 2014, declaring equivalence between the legal and supervisory framework of the four countries and EMIR for the regulation and supervision of CCPs. In addition, a Memorandum of Understanding was signed with each of the authorities in the four countries regarding arrangements for cooperation related to ESMA’s monitoring of the ongoing compliance by CCPs established in each country with the recognition conditions set out in Article 25 of EMIR. Ten CCPs established in Australia, Hong Kong, Japan and Singapore obtained recognition under EMIR on 29 April 2015.2
The recognition of a third country CCP is also important for the clearing members of the CCPs. Recognition under EMIR will give the CCP the status of being a qualifying CCP (“QCCP”) which is relevant for clearing member firms to calculate their capital requirements for exposures to CCPs under the EU Capital Requirements Regulation (“CRR”). Lower capital requirements are imposed for exposures to a QCCP than for exposures to a non-QCCP CCP. Under the CRR transitional measures, the enhanced capital requirements would have applied for exposures to non-QCCPs from 15 June 2014, albeit that the European Commission has used its powers to extend that deadline twice and may do so again. In particular, the deadline may be extended further given that there are CCPs established in major derivatives jurisdictions, such as the US, which are not yet recognised under EMIR.3
Both the Commission and ESMA have reiterated that ESMA’s technical advice should not prejudge a final decision on equivalence. The advice is, nevertheless, a clear indication of those areas where equivalence decisions are likely to be forthcoming or where there is conflict with EMIR. ESMA’s advice is that most of the assessed countries have effective supervisory regimes for the derivatives markets, although not in all aspects. Unqualified equivalence decisions are still difficult to achieve. For example, rules on margin requirements and segregation differ between many countries and any equivalence decision not yet made by the Commission for the CCP regime of a third country is likely to remain pending until a proper assessment has been made of those final rules.
The matrix below provides a status update and summarises the key outcomes of ESMA’s technical advice for the jurisdictions on which ESMA has published advice.
Note:
- For Canada, ESMA concluded, on 1 October 2013, that it was not in a position to perform a conclusive analysis as Canada was still in the process of finalising its regulatory regime. ESMA will wait to receive a new mandate from the Commission before providing advice.
- For Switzerland, ESMA has provided advice for CCPs only. ESMA concluded, on 1 October 2013, that it was not in a position to perform a conclusive analysis as Switzerland was still in the process of finalizing its regulatory regime other than for CCPs. ESMA will wait to receive a new mandate from the Commission before providing advice.
- For Singapore and Hong Kong, ESMA’s advice was only requested for TRs and CCPs.
- For South Korea and India, ESMA’s advice was only requested for CCPs.
(Click to enlarge)
End Notes:
1 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.
2 The ten CCPs are ASX Clear (Futures) Pty Ltd, ASX Clear Pty Ltd, HKFE Clearing Corporation Limited, Hong Kong Securities Clearing Company Limited, OTC Clearing Hong Kong Limited, SEHK Options Clearing House Limited, Japan Securities Clearing Corporation, Tokyo Financial Exchange Inc, Singapore Exchange Derivatives Clearing Limited and The Central Depository (Pte) Limited.
3 A joint statement by Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union and Timothy Massad, Chairman of the US Commodity Futures Trading Commission published on 7 May 2015 indicates that further work is necessary before an equivalence decision for CCPs regulated and supervised by the CFTC will be made, see http://europa.eu/rapid/press-release_STATEMENT-15-4944_en.htm?locale=en.
For further information, please contact:
Barnabas W.B. Reynolds, Partner, Shearman & Sterling
barney.reynolds@shearman.com
Thomas Donegan, Partner, Shearman & Sterling
thomas.donegan@shearman.com
Geoffrey B. Goldman, Partner, Shearman & Sterling
geoffrey.goldman@shearman.com
Ian Harvey-Samuel, Partner, Shearman & Sterling
ian.harvey-samuel@shearman.com
James Duncan, Partner, Shearman & Sterling
james.duncan@shearman.com
Patrick Clancy, Partner, Shearman & Sterling
patrick.clancy@shearman.com
Azad Ali, Shearman & Sterling
azad.ali@shearman.com
