On 3 September, ESMA published its first technical advice to the European Commission on the equivalence of the US and Japanese derivatives frameworks to the EU rules. On 2 October, ESMA supplemented its technical advice with complete equivalence findings on Australia, Switzerland, Hong Kong, Singapore, Canada, South Korea and India. 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 countries' rules on derivatives have been considered equivalent, but this is subject to market participants agreeing to apply European standards, where higher.
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. The scope of the advice covers the recognition of non-EU CCPs and TRs, and for some countries only, the clearing obligation, reporting obligation, non-financial counterparties ("NFCs"), portfolio reconciliation, dispute resolution, portfolio compression and margin requirements. In early September, ESMA published its advice on the US and Japanese regimes as well as advice on the regimes for CCPs for Australia, Hong Kong, Singapore and Switzerland.2 ESMA has now published its complete advice for these jurisdictions, in addition to advice for the regimes in Canada, South Korea and India. 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 almost all of the countries studied have effective supervisory regimes for the derivatives markets. Stumbling blocks for more unqualified equivalence decisions remain. For example the Australian, Hong Kong and Swiss regulatory regimes are still in the process of being finalised and rules on margin requirements still need to be finalised in many countries. As such, any equivalence decision will remain pending until a proper assessment is made of the final rules in these jurisdictions.
Some of the requirements came into effect on 15 September 2013, in response to which many industry participants have adhered to the ISDA 2013 EMIR portfolio reconciliation, dispute resolution and disclosure protocol.
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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1 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.
2 This note updates our previous note "ESMA Advice on Third-Country Equivalence Under EMIR" published on 5 September 2013.
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