United States

3 Thoughts On global regulators’ update to G20 On derivatives cross-border implementation

On September 10, 2014 the Over-the-Counter (OTC) Derivatives Regulators Group (ODRG), consisting of derivatives market regulators from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland, and the United States (CFTC and SEC) released a report to the G20 that provided an update on the resolution of key cross-border derivatives reform implementation issues.

As discussed in our prior blog post, Report of the OTC Derivatives Regulators Group on cross-border implementation issues, the report focused largely on the following cross-border issues, which have been causing compliance planning and implementation concerns for many global derivatives market participants:

treatment of branches and affiliates; and
regulation of organized trading platforms and implementation of the G20 trading commitment.

The ODRG will prepare another report on OTC derivatives cross-border implementation issues for the upcoming November 2014 G20 Leaders Summit.

Following are 3 thoughts to consider with respect to this report:

need to harmonize cross-border derivatives rules: Although the report itemizes ODRG members’ “progress in the area of equivalence and substituted compliance,” it is silent regarding issues on which progress has been sorely lacking. Most notably, the EU has not proposed an equivalence determination for US central counterparties. A failure to do so by December 15 could have serious consequences such as, for example, increased capital requirements for European banks for transactions cleared at US clearinghouses.

treatment of branches and affiliates: This is a particularly thorny area, as the complicated legal issues involved also have competitive implications. The report states that the ODRG “has analyzed several alternatives and continues to explore potential solutions” for the treatment of branches and affiliates. But little detail is offered. One hopes that in the next report, prior to the November 2014 G20 Leaders Summit, there will be more progress to report on this key issue.

barriers to reporting to trade repositories: The report is at its most specific in its call to action to remove data protection laws, blocking statutes, and secrecy laws in some jurisdictions that prevent the identification of counterparties when reporting derivatives transactions to trade repositories. The report recommends that the Financial Stability Board (FSB) make “a clear and unambiguous statement that jurisdictions need to remove all barriers” to reporting such information and set an “ambitious but realistic” deadline for addressing these barriers. In regard to the latter, market participants should be aware that the ODRG also is considering the possibility of a deadline by which “masking” of counterparty-identifying information in reports to trade repositories would no longer be permitted.