Joint Statement on Cross-border Regulation of OTC Derivatives Issued by SEC and International Regulators | Practical Law

Joint Statement on Cross-border Regulation of OTC Derivatives Issued by SEC and International Regulators | Practical Law

The SEC and regulators from various global jurisdictions issued a joint statement on operating principles and areas of further interest in establishing a comprehensive set of regulations for the cross-border OTC derivatives market.

Joint Statement on Cross-border Regulation of OTC Derivatives Issued by SEC and International Regulators

by PLC Finance
Published on 13 Dec 2012 • USA (National/Federal)
The SEC and regulators from various global jurisdictions issued a joint statement on operating principles and areas of further interest in establishing a comprehensive set of regulations for the cross-border OTC derivatives market.
On December 4, 2012, the SEC, in conjunction with regulators from various global jurisdictions, issued a joint statement on operating principles and areas of further interest in the regulation of cross-border over-the-counter (OTC) derivatives. The statement was released by the SEC in conjunction with regulatory bodies from:
  • Australia.
  • Brazil.
  • The European Union.
  • Hong Kong.
  • Japan.
  • Ontario.
  • Quebec.
  • Singapore.
  • Switzerland.
It is noteworthy that the CFTC, which has taken the lead on OTC derivatives regulation in the US, did not sign onto the statement. However, reports have circulated that the CFTC intends to modify its proposed definition of "US person" in order to address concerns expressed by non-US regulators regarding the extraterritorial reach of Dodd-Frank swaps rules. For information on CFTC interpretive guidance on the cross-border application of Dodd-Frank swaps rules, see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules.
The regulators reaffirmed their support for robust and consistent global standards across jurisdictions in order to:
  • Reduce market risk and abuse.
  • Minimize regulatory gaps, regulatory arbitrage opportunities and uncertainty.
  • Equalize opportunity for participants, intermediaries and infrastructures across borders in the OTC derivatives market.
In recognizing that the cross-border OTC derivatives market presents obstacles to regulation, including differing law, policy, markets and implementation timing across jurisdictions, the regulators reached the following understandings and identified the following areas for further exploration:
  • Mandatory clearing requirements. The regulators agreed to consult with each other before making any final determinations on which derivatives will require mandatory clearing and to consider requiring clearing for financial products that require clearing in other jurisdictions. It is noteworthy that the CFTC has already issued a final clearing determination for certain interest rate swaps and credit default swaps (CDS) (see Legal Update, Final Clearing Determination for CDS and Interest Rate Swaps Issued by CFTC).
  • Information sharing, supervisory and enforcement cooperation. The regulators will attempt to ensure that each will enter into:
    • supervisory cooperation arrangements with the other relevant regulators (guided by the model supervisory cooperation arrangement adopted by the International Organization of Securities Commissions (IOSCO)); and
    • bilateral enforcement agreements with the other relevant regulators (guided by the IOSCO Multilateral Memorandum of Understanding).
  • Timing of implementation. The regulators agreed to a reasonable but limited transition period to facilitate cross-border regulatory requirements, consistent with the G-20 regulatory reform agenda for OTC derivatives markets.
The regulators also discussed different possibilities for regulating cross-border transactions as well as persons and infrastructures that engage in cross-border OTC derivatives activity subject to more than one set of rules. The regulators agreed to consider the following:
  • Recognition. A regulator could decide that market participants, intermediaries and infrastructures have met some or all of its regulatory requirements if these entities are already regulated by an authority in another jurisdiction that the regulator deems to have comparable or equivalent regulations to its own.
  • Registration and substituted compliance. A regulator that requires all market participants, intermediaries and infrastructures to register with it could allow compliance with foreign regulations to substitute for compliance with its own otherwise-applicable rules if the foreign regulations are deemed to meet the same regulatory objectives as its own and the foreign regulator has the means and authority to enforce compliance.
  • Transactions and substituted compliance. A regulator could allow compliance with foreign regulations to substitute for compliance with otherwise-applicable transaction-level requirements under its own regulations.
  • Registration categories and exemptions. A regulator could allow market participants, intermediaries and infrastructures the opportunity to satisfy or be exempt from certain registration or other requirements after taking into account these entities' obligations to other regulators.
The regulators agreed that permitting compliance with another jurisdictions's rules and regulations through either recognition or substituted compliance cannot preclude a regulator from taking regulatory or enforcement measures under the laws of its own jurisdiction, but would require cooperation with other regulators.
The regulators agreed to meet next in Brussels in early 2013.
For more information on substituted compliance and the CFTC's interpretive guidance on the cross-border application of Dodd-Frank swaps rules, see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules.
For a comparison of US and European regulation of OTC derivatives, see Practice Note, US and EU OTC Derivatives Regulation: a Comparison of the Regimes.