Clarity to market participants on the equivalence of derivatives rules to European requirements has been much anticipated. On 3 September, ESMA published its technical advice to the European Commission on the equivalence of the US and Japanese derivatives frameworks to the EU rules. The advice is not the final EU statement on the equivalence of these regimes, because the European Commission is charged with adopting legislative acts on equivalence. Once it has considered ESMA's advice, the Commission has the discretion (not apparently limited to concerns about financial services) to declare equivalence. Broadly speaking, several US and Japanese rules on derivatives have been considered equivalent, but this is subject to market participants agreeing to apply European standards, where higher.
Equivalence
Under the European Market Infrastructure Regulation ("EMIR")1 the European Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a non-EU country are equivalent to the requirements in EMIR. For a central counterparty ("CCP") or trade repository ("TR") established in a non-EU country to provide their services in the EU, an equivalence decision is one of the requirements that must be fulfilled before the European Securities and Markets Authority ("ESMA") will grant access of the CCP or TR to EU investors. Equivalence decisions on other obligations under EMIR have the effect that if one party to a derivative trade is established in a non-EU country and the contract is subject to EMIR, the counterparties may choose to follow the non-EU country's equivalent regime instead of EMIR.
The European Commission requested ESMA to provide its technical advice on the equivalence of certain non-EU countries which host large derivatives markets, to assist the Commission in formulating its equivalence decisions, starting with the US and Japan. The scope of the advice covers the recognition of non-EU CCPs and TRs, the clearing obligation, reporting obligation, non-financial counterparties ("NFCs"), portfolio reconciliation, dispute resolution, portfolio compression and margin requirements. Advice on the regimes for CCPs and TRs has also been provided for Australia, Hong Kong, Singapore and Switzerland, despite the deadline for that advice being 1 October 2013. ESMA confirms that it continues to work on the advice on other areas for these jurisdictions. ESMA is also working on technical advice for the regimes in Canada, India and South Korea. Advice relating to Dubai has been postponed.
Both the Commission and ESMA have stated that ESMA's technical advice should not be construed as "prejudging" the European Commission's final decision on equivalence. The advice is, nevertheless, a clear indication of those areas where equivalence decisions are likely to be forthcoming. ESMA's advice is that all of the countries studied have effective supervisory regimes for the derivatives markets. Stumbling blocks for more unqualified equivalence decisions remain. For example rules on margin requirements still need to be finalised in many countries and any equivalence decision will remain pending until a proper assessment is made of the final rules.
Because the ESMA advice remains to be ratified by the Commission, it does not affect the need for those who deal with European counterparties to comply with EU requirements on portfolio reconciliation and dispute resolution procedures by 15 September 2013, such as by executing the new ISDA protocol on these topics.2
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Footnotes
1 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.
2 For more information on the steps corporates and funds should be taking for EMIR compliance you may refer to our client publication, Alert: Actions required in light of Derivative Reforms. For more information on EMIR and related legislation in other jurisdictions you may refer to the following: Alert: ESMA consults on Extraterritoriality, OTC Derivatives Regulation and Extraterritoriality III, and The Revised EU and US Regulatory Frameworks for Commodity Derivatives.
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