30 June 2020

IOSCO publishes Good Practices on processes for deference

Good Practices identified in this Report cover all phases of deference assessments – from the initial stages to the processes put in place once an assessment determination has been made. They derive from a general consensus by members on the foundational philosophy behind deference determinations.

The Board of the International Organization of Securities Commissions (IOSCO) today published a series of eleven good practices on processes for deferenceto assist regulatory authorities in mitigating the risk of  unintended, regulatory-driven market fragmentation and to strengthen international cooperation.   

Wholesale securities and derivatives markets are global in nature and many market participants operate on a cross-border basis.  As a result, numerous authorities have implemented deference processes that allow them to rely on one another to regulate and supervise these market participants and help reduce potentially duplicative or conflicting regulations. 

Over time, the use of deference between regulators has significantly increased, in parallel with enhanced cross border capital flows. IOSCO’s 2019 Report onMarket Fragmentation and Cross-Border Regulation, which was submitted to the G-20, suggested that IOSCO should identify good practices to enhance the processes for deference determinations further. 

The aim of the eleven Good Practices identified in today´s report is to help members in establishing and operating efficient deference processes. They are underpinned by the philosophy that deference processes should be outcomes-based, risk-sensitive, transparent, sufficiently flexible and supported by strong cooperation. They cover all phases of the deference process and focus on several key issues, such as:

•           arrangements for ensuring transparency of deference processes, including the scope, steps and criteria;

•           the criteria for making an outcomes-based assessment of the assessed authority and/or firm, including the nature of the supervisory and enforcement practices in the assessed jurisdiction;

•           important factors such as the nature and degree of risks that entities from another jurisdiction may pose in their markets;

•           the level of engagement, cooperation and communication between the assessing authority and the assessed authority and/or firm throughout the process and once deference has been granted; and  

•           revocation of a deference determination.

IOSCO drew on the experience of the European Commission and members of the Committee on Payments and Market Infrastructures (CPMI)-IOSCO to develop these Good Practices.

Ashley Alder, CEO of the Securities and Futures Commission Hong  Kong and Chair of IOSCO, said:  “IOSCO has played a key role in encouraging cooperation between securities regulators. This is increasingly important at a time when it is more vital than ever to support efficient, safe cross border investment flows to help fund economies undergoing major stresses.  This Report is a major contribution to this effort.” 

Jun Mizuguchi, Senior Deputy Commissioner for International Affairs at the Japan Financial Services Agency and co-chair of IOSCO´s follow-up work on market fragmentation said: “Deference is a powerful tool for addressing the risk of regulatory-driven fragmentation in increasingly cross-border markets.  This Report will assist both regulatory authorities who are looking to add deference to their regulatory options and those seeking to improve their current processes.”

Louis Morisset, President and Chief Executive Officer of the Autorité des marchés financiers Quebec and co-chair of this work, added: “In the past, the G-20 has stressed the importance of authorities deferring to one another when justified and in the right circumstances. Great efforts have been made since then, with numerous jurisdictions implementing tools that IOSCO published in 2015 to strengthen cross-border cooperation. Nevertheless, further improvements are needed, and we believe this Report is a step in that direction.”

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In June 2019, IOSCO published a report on Market Fragmentation and Cross-Border Regulation (the 2019 Report) which examined harmful, unintended market fragmentation in wholesale securities and derivatives markets.

Among other things, the 2019 Report considered practical steps IOSCO and its members could take to mitigate the adverse effects of this type of fragmentation and further strengthen cooperation between regulatory authorities.

The G20 has previously stated that jurisdictions and regulatory authorities should be able to defer to one another when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, in a non-discriminatory way and paying due regard to home country regulatory regimes.2 The 2019 Report explored this concept of deference, particularly how its use has evolved in recent years and the lessons that could be learned from how members have applied tools such as substituted compliance, recognition and passporting.

The 2019 Report found that deference between regulators, through the use of cross-border regulatory tools, has significantly increased in recent years, in parallel with increased supervisory and enforcement cooperation. While these developments have helped mitigate some instances of harmful market fragmentation, certain challenges remain. Some of these challenges relate to the underlying processes that authorities rely on to make deference determinations. As a result, the 2019 Report suggested there may be benefit in identifying good and sound practices to make the processes for deference determinations more efficient. IOSCO has identified a number of good practices (the Good Practices), which are the subject of this 2020 Report.

To inform the development of these Good Practices, IOSCO conducted a survey of IOSCO Board Members and Observers, the European Commission (EC) and Members of the Committee on Payments and Market Infrastructures (CPMI)-IOSCO. IOSCO also made use of the deference assessments shared by its members through its repository on deference decisions and, where appropriate, has reviewed external publications.

While this Report notes that there is no “one-size-fits-all” and that not every Good Practice may be applicable in all jurisdictions or in all circumstances, it nevertheless sets out a series of Good Practices with the aim of assisting members in establishing and operating efficient deference processes that are easily understood by entities being assessed for deference – both authorities and/or firms -- without prejudice to the existing legislative requirements or frameworks that authorities have in place....

 

Full Report at IOSCO

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