The EC yesterday adopted
equivalency decisions for Australia, Hong Kong, Japan and
Singapore’s central counterparty (CCP) regulatory
regimes. Market participants believe this signals the
Commission’s focus on regulatory outcomes.
Asian regulators and industry bodies have been especially concerned
about extraterritorial derivatives regulations, particularly
the US Dodd-Frank Act and the European Market Infrastructure
They have stressed that those rules were created to
regulate developed markets, hindering the less sophisticated
ones in Asia.
This may prove that – despite industry
sceptism – regulators are willing to take a pragmatic
approach to establish global regulations for OTC
"This is a positive step forward, and shows that
regulators are working to put the pieces together and create
the needed detailed framework to implement the general
principle of equivalence," said Yvonne Siew, partner at Allen
Market participants recognise that it may be
impossible to reach international convergence by having the
same rules on OTC derivatives. But regulators can try to get to
the same place by recognising other countries’
central counterparties (CCPs) as equivalent.
That would require broad agreement on the outcomes,
and equivalence on the outcomes shouldn’t
necessarily depend on the specifics of texts and rules, said
Keith Noyes, Asia-Pacific regional director at the
International Swaps and Derivatives Association (Isda). "The
regulators must trust each other," he added.
EC’s equivalence decision for Australia, Hong
Kong, Japan and Singapore signals its focus on regulatory
- This helps
Asian markets because European bank branches are now able to
become direct clearing members of their CCPs;
- Asian CCPs must
now apply for Esma approval before European banks can become
t’s hoped that the EC will continue to have a
outcomes-based approach when determining equivalency and that
other regulators will follow
The biggest beneficiaries will be the European banks wishing
to continue to do business in these markets, Noyes said.
By finding the CCPs in these four jurisdictions equivalent,
the European bank branches are now able to become direct
clearing members of the CCPs, he said. Further it means that
they’re able to treat them as qualifying CCPs,
which enjoys a far better regulatory capital treatment regime
than if they were non-qualifying.
This is also positive for the Asian markets because they
don’t want to see the possible withdrawal of
liquidity were the European banks required to resign their
memberships. "I see this as a win-win situation," he said.
The home country regulator in each jurisdiction will now
have to sign a memorandum of understanding (MoU) with European
Securities and Markets Authority (Esma). "We
haven’t seen any of these MoUs, but
we’ve heard that the drafts are reasonable and
balanced on both sides, which is also a good development," he
But there is still work to be done.
Rebecca Terner Lentchner, head of policy and regulatory
affairs the Asia Securities Industry and Financial Markets
Association, said that she was thrilled the EC has come forward
and given country equivalence for these jurisdictions, but
added that this should just be the first part of the
'We’re now looking forward to Esma recognition
decisions for the CCPs themselves in the designated
jurisdictions," she said. "Obviously while this is a big step
forward, it’s not the only step necessary before
the issue is behind us in Asia."
These decisions suggest that the EC is looking at regulatory
outcomes rather than a reading of jurisdictions’
relevant legislation, reducing concerns that
Esma intended to require a strict definition of
In the initial round of appraisals, Esma considered
comparing legislative texts. A number of Asian jurisdictions
diverge in areas where the regulation’s powers are
devolved to the CCP clearing houses that make the CCP rules,
and a lot of outcomes are achieved through those rules, said
"Once European regulators were convinced to consider that
CCP rules in all cases are approved by home country regulators,
they began to look at CCP rules along with the legislative text
in the equivalence studies, he added. "The equivalence
determinations then became more obvious."
Siew hopes that this will encourage other regulators to
start their own equivalency studies, or take similar steps in
their own jurisdictions. While this may be slower in Asia,
where rules are less developed, this is a very positive step
for the EU, she said.
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