Europe Calls for Harmonization of OTC Swaps Rules

Terry Flanagan

The European Securities and Markets Authority, the pan-European regulator, is calling on its U.S. counterparts to harmonize the treatment of swap dealers in derivatives regulations being developed on both sides of the Atlantic.

While the Dodd-Frank Act in the U.S. and the Emir regulation in Europe have many similarities, there are some differences that will require joint action by regulators, like the U.S. Commodity Futures Trading Commission and Esma in Europe, who are responsible for implementing the laws.

One of the differences between the respective regulatory frameworks relates to the registration of foreign entities, such as swap dealers, which is required under U.S. rules but not under European Union rules.

This registration requirement will apply to entities that are already authorized as dealers (investment firms or banks) under EU rules, and the U.S. regime will therefore apply to entities and transactions that are also subject to EU rules.

As the two sets of rules are similar in substance, there is a clear case for avoiding the situation where a particular entity or transaction is simultaneously subject to two sets of rules.

“The application of two sets of rules to a single entity or transaction will lead to legal uncertainty and will be unnecessarily burdensome for firms,” said Steven Maijoor, chair of Esma, in a recent letter to U.S. legislators.

As highlighted in a statement issued by a group of OTC derivatives market regulators, including Australia, Brazil, the EU, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the U.S., following their meeting in late November, a number of conflicting, duplicative and inconsistent requirements have been identified when analyzing the simultaneous application of different national regulations.

These requirements, if applied on a cross-border basis to the same entities and transactions, would, in certain cases, impede a transaction from taking place or might impede an entity from operating with U.S. counterparties.

“Compliance with regulations is happening, but at what cost?” said Zohar Hod, global head of sales and support at SuperDerivatives, a provider of derivatives data and analytics. “The cost of complying with these regulations could add up to hundreds of billions of dollars. The total figure is yet to be determined as the final rules are still unclear. At the moment, many parts of the regulations are being delayed, therefore many players are taking a wait and see approach until there is a better understanding. However, some changes are happening. The question is at what cost and will they be efficient?”

Esma is of the view that registration and other requirements should be suspended for foreign entities. The registration requirement that EU swap dealers face is required at a stage when several associated rules that they will have to comply with in the future are not yet final. In addition, international co-ordination efforts are still under development and subject to the dialogue between international OTC derivatives market regulators.

“Therefore, foreign swap dealers would be required to register without knowing with sufficient certainty the complete set of rules that will bind them as a consequence of their registration, and how those rules will be applied in an international context—including how substituted compliance will work,” Maijoor said.

Esma remains concerned about the fact that the registration application grants access to U.S. supervisors and the U.S. Department of Justice to the books and records of registered swap dealers. It is important to reconcile this “with the privacy or blocking laws that in many jurisdictions restrict the type of data that banks and investment firms can share with anyone except their national supervisors with a statutory power to require those data”, said Maijjoor.

“While we have achieved some progress on reaching an agreed approach to resolving cross-border issues, our international dialogue has not yet been exhausted and, therefore, fixing the registration requirement ahead of the conclusion of that dialogue could undermine the above-mentioned cooperation process,” he added.

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