At the St. Petersburg Summit 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 regulatory regimes" (G20 Leaders' Declaration, September 2013, St. Petersburg at para. 71).
The G20 Leaders noted in their November 2014 Declaration, "[w]e call on regulatory authorities to make further concrete progress in swiftly implementing the agreed G20 derivatives reforms. We encourage jurisdictions to defer to each other when it is justified, in line with the St Petersburg Declaration" (G20 Leaders Communique, November 2014, Brisbane).
The focus was on delineating and describing forms of deference in the context of central counterparties (CCPs) in view of the importance of CCPs in the global OTC derivatives markets.
Overall, as of 27.02.2017 some 15 EU acts have envisioned assessments of equivalence of foreign rules and supervision for EU regulatory purposes (Commission Staff Working Document, EU equivalence decisions in financial services policy: an assessment, 27.2.2017 SWD(2017) 102 final, p. 10, 11).
Empowerments have already been used for CRD4/CRR, Solvency II, Market Abuse Regulation (MAR), EMIR, accounting standards, statutory audit and credit rating agencies.
The said Commission Staff Working Document of 27 February 2017 refers, moreover, to the fact that the European Commission has adopted 212 equivalence decisions and a total of 32 jurisdictions have been positively assessed for at least one area.
Japan has had most equivalence findings with 17 positive determinations, followed closely by the US and Canada, each having 16 equivalence decisions.
They are followed by Australia (13), Brazil (12) and Singapore (11).
Power to exercise deference
In line with the agreement of G20 Leaders reached at the St Petersburg Summit in 2013, 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 newly finalised Australian and Canadian margin regimes provide for deference to foreign regimes on a case-by-case basis.
- In Australia, in December 2016, APRA finalised its new Prudential Standard CPS 226 Margining and risk mitigation for NCCDs, which provides it with the power to approve substituted compliance with respect to the margin requirements of a foreign jurisdiction. CPS 226 also gives APRA the power to limit the scope of or impose conditions on recognised substituted compliance.
- In Canada, in certain circumstances, the Office of the Superintendent of Financial Institutions (OSFI)’s margin guideline for non-centrally cleared derivatives allows for deference to the regulatory framework of the home jurisdiction on matters such as the definition of a covered entity, threshold for initial margin and minimum transfer amounts. In addition, foreign bank branches (FBB) operating in Canada or covered federally-regulated financial institutions (FRFIs) dealing with a foreign (i.e. non- Canadian) counterparty will be deemed in compliance with OSFI’s margin requirements if the FBB or FRFI has complied with the margin requirements of the foreign jurisdiction and the FBB or covered FRFI has documentary evidence that the margin requirements of the foreign jurisdiction are comparable to the BCBS-IOSCO margin requirements for NCCDs.
In Canada, substituted compliance has been granted to market participants and infrastructures complying with comparable US CFTC and EU regulations regarding mandatory central clearing and segregation of customer collateral.
In the EU, in December 2016, the EC adopted six ‘equivalence’ decisions (implementing acts) for the regulatory regimes for CCPs in Brazil, the Dubai International Financial Centre, India, Japan (commodities), New Zealand, and the United Arab Emirates.
In Hong Kong, the HKMA currently permits substituted compliance with respect to the margin and risk mitigation standards for NCCDs of WGMR member jurisdictions45 are deemed as comparable from the day the respective standards have entered into force in such jurisdictions until the HKMA has completed a comparability assessment.
In Japan, in October 2016, the JFSA published a public notification which designated the margin rules of US (CFTC) and Canadian (OSFI) regulators as equivalent to JFSA rules.
Substituted compliance is provided to a transaction subject to duplicative application of Japan and foreign margin rules to the transaction.
In Switzerland, in July 2016, FINMA determined the EU derivatives framework set out in EMIR as provisionally equivalent with corresponding Swiss requirements, with the aim to give financial market participants sufficient lead time for technical implementation.
In the US, in September 2016, the CFTC issued a comparability determination for margin requirements for NCCDs applicable to certain swap dealers and major swap participants under the laws and regulations applicable in Japan. The US Prudential Regulators (the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Farm Credit Association and Federal Housing Finance Agency) have begun the substituted compliance determinations process with respect to major jurisdictions that have margin rules in place.
OTC Derivatives Market Reforms Twelfth Progress Report on Implementation, Financial Stability Board, 29 June 2017, p. 24, 25
OTC Derivatives Market Reforms Twelfth Progress Report on Implementation, Financial Stability Board, 29 June 2017
Commission Staff Working Document, EU equivalence decisions in financial services policy: an assessment, 27.2.2017 SWD(2017) 102 final
Report of the OTC Derivatives Reporting Group (ODRG) to G20 Leaders on Cross-Border Implementation Issues, November 2015
Recognition of non-EU financial frameworks (equivalence decisions), European Commission's website