18 September 2014

FSB: Jurisdictions' ability to defer to each other's OTC derivatives market regulatory regimes

Deference – in part or in full – to another jurisdiction’s OTCD regulatory regime, where appropriate, is an important tool for addressing some of the issues arising from differences in the regulatory reforms that jurisdictions undertake to meet the G20’s overall goals. In September 2013, the G20 Leaders agreed that “jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, in a non-discriminatory way, paying due respect to home country regulation regimes.” The FSB’s April 2014 progress report on implementation of OTCD market reforms also urged jurisdictions to provide clarity on their processes for making equivalency or comparability decisions.

To assist authorities’ and the market’s understanding of the legal capacities and processes jurisdictions have in place, or have proposed, to defer to one another in cross-border contexts, the FSB Chairman wrote to all FSB member jurisdictions on 8 May 2014 asking them to set out their frameworks with regard to OTCD reforms. In particular, the FSB Chairman’s letter requested information on frameworks for deference to another jurisdiction’s OTCD regulatory requirements applicable to trade repositories (TRs), central counterparties (CCPs) and exchanges/electronic trading platforms (together, “infrastructure providers”) and to market participants.

The main findings that emerge from these responses are as follows:

While there are some broad similarities in how jurisdictions approach the application of “deference”, there are nevertheless still differences in the circumstances under which deference would be applied, and how it would be applied.

The authority (or types of authority), standards and processes for making determinations vary across jurisdictions and, in some instances, within jurisdictions, depending on the entity requesting deference or the scope of deference being granted.

Among the 14 FSB member jurisdictions that report having some authority to exercise deference, all of these jurisdictions report having a framework for deference in place with respect to infrastructure providers, while fewer report having a framework for deference in place with respect to market participants. With respect to market participants, jurisdictions more commonly report having (or contemplating having) a framework for deference to certain transaction-level requirements than for entity-level requirements (such as the supervision of participants).

Of the 14 member jurisdictions that report having some authority to exercise deference, 8 noted having specific statutory authority, 4 noted having authority based on general rule-making or exemptive authority, and 5 noted that deference could be granted based on discretionary authority.2 Some jurisdictions can use a combination of these authorities for making deference decisions.

The scope of deference a supervisor or regulator can exercise and the standard used for deference varies across jurisdictions and often even within a jurisdiction, depending on the policy area, the supervisor or regulator exercising deference (and the scope of the statutory authority granted to the supervisor or regulator) and/or the type of entity to which deference is being granted.

Jurisdictions typically maintain their supervisory authority by requiring entities to register, be licensed or apply for an exemption, even if deference can be granted for a wide range of oversight responsibilities and requirements.

As a condition for granting deference, many jurisdictions report that they will require the relevant foreign authorities to enter into, at minimum, information sharing or cooperation arrangements (e.g. memoranda of understanding). Jurisdictions also report that they will look closely at the home/host country’s actual oversight and enforcement regimes as well as the home/host country’s use of non-public or confidential information.

In most jurisdictions, the assessment process would be triggered by an application from an entity or from the regulator or supervisor from a jurisdiction that has entities that are likely to operate or provide services in jurisdiction from which deference is being requested. The assessment process could take at least several months to complete. Most jurisdictions were not able to provide specific timelines for reaching a final decision.

Although most jurisdictions have in place the authority to make deference decisions, only a small number of jurisdictions have to date made determinations and are already deferring to other jurisdictions for some portion of OTCD regulation – only 3 jurisdictions report having some deference arrangements in place as of July 2014. (Australia, Canada, and the US (Commodity Futures Trading Commission (CFTC)); in the EU, the European Commission (EC) is in the course of proposing deference be granted to a number of jurisdictions with respect to central clearing).3

Further decisions on deference by jurisdictions or individual regulators can be expected over time as the OTCD reform process progresses. Some jurisdictions report that they anticipate making deference decisions only when their own rules are in effect and when rules in other jurisdictions are also finalised.

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