As of the beginning of September, ESMA has now issued its recommendations on the equivalence of six countries’ OTC rules: the US, Australia, Hong Kong, Japan, Singapore and Switzerland. However, only Australia and Switzerland were found to be equivalent, whereas firms and FMIs from the other four countries will have to be jump through certain additional hoops before they are compliant with EU rules. This now makes the EU’s ‘no compromise’ approach to EMIR compliance clear, meaning that trading, legal, compliance and ops and tech are going to be very busy in the coming months figuring out what this means for their area of the business.
However, there is still a lack of clarity around what the final rules will look like: Firstly, these documents are recommendations and so do not in any way bind the Commission’s subsequent decisions, meaning that the rules are subject to change. Secondly, reinforcing the first point, ESMA and the Commission have been known to disagree in the recent past (such as over the definition of open/closed-ended funds under the AIFMD). Thirdly, there are still many more countries left to be assessed and, reciprocally, each of those countries must then assess each other.
In practical terms, this means that compliance for a firm/FMI that provides services in the US and Europe will have a different set of rules to one that provides services between Europe and India or India and the US. In other words, what we are seeing is an exponential growth in rules that threaten to fragment the global OTC market.
This problem is a product of individual jurisdictions’ approaches to acknowledging other countries’ rules. For instance, in their recommendations, ESMA have stated that they are taking a ‘holistic’, ‘objectives-based’ approach to equivalence. This makes it sound as if the result will be a single, neat rule declaring EMIR and the relevant sections of, for instance, Dodd-Frank to be equivalent. However, what we end up with is separate rules and recommendations for CCPs, TRs and the different elements of firm compliance: clearing, portfolio reconciliation, dispute resolution etc.
As mentioned, the impact of this is going to result in further work for legal and compliance to determine what the new rules mean for your implementation strategy, which may even mean undoing some of the changes that have been implemented thus far (see our other recent article on this subject). However, we will have to wait for the Commission’s response to have any certainty on the final rules.
When will this decision come? The Commission’s letter to ESMA indicates that third country FMIs seeking recognition have to apply to ESMA by 15 September 2013 and that ESMA should respond to any such request within 6 months. Therefore, the Commission says, it will ‘work in parallel’ with ESMA to enable these decisions to be made on time. Presumably this means that the Commission will publish its decision within the next 6 months, but whether this also means that they will recognise FMIs on a case-by-case basis in the interim is uncertain.
In the end, conflicting sets of rules do nothing to promote financial stability and competition in the markets. If we are to realise the G20‘s vision, as Mark Carney recently wrote in the FT, ‘we must be prepared to defer to each other’s rules on a cross-border basis.’ This is not that approach.