Asia-Pacific equivalence prompts European OTC optimism

Author: Ashley Lee | Published: 31 Oct 2014
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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 Reform (Emir).

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 derivatives.

"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 & Overy.

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.


  •  The EC’s equivalence decision for Australia, Hong Kong, Japan and Singapore signals its focus on regulatory outcomes;
  •  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 members;
  •   t’s hoped that the EC will continue to have a outcomes-based approach when determining equivalency and that other regulators will follow

What this means

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 added.

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 process.

'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."

Equivalency signals

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 equivalence.

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 Noyes.

"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.

See also

Isda: margin rules for uncleared swaps need more time

Uncertainty surrounds CFTC footnote 513

SEC and Asic reveal Emir equivalency concerns