On November 7, 2014, the Over-the-Counter (OTC) Derivatives Regulators Group (ODRG), consisting of derivatives market regulators (referred to as “Principals”) from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland, and the United States (CFTC and SEC) issued a report updating the G20 Leaders on certain cross-border issues associated with the G20’s OTC derivatives reform agenda.
Similar to previous reports, this ODRG report focused on issues involving organized trading platforms, the treatment of branches and affiliates, barriers to reporting information to trade repositories, and deference to foreign regimes.
Following are 3 shortcomings to consider:
- regulation of foreign platforms: Recognizing that certain jurisdictions’ registration requirements for foreign platforms have resulted in “unintended consequences” (for example, the drop off of cross-border liquidity pools on electronic platforms), the ODRG Principals agreed that regulators should consider one or more of the following approaches for the treatment of foreign platforms: (1) recognition, (2) registration and substituted compliance or (3) registration categories and exemptions.
Regulators should acknowledge that a solution must involve coordinated and perhaps multilateral action. Because the burdens often stem from registration requirements in multiple jurisdictions, unilaterally removing one country’s registration requirements for foreign platforms may not solve all relevant issues.
- regulation of guaranteed affiliates: The ODRG Principals are considering recommendations regarding when a guarantor’s regulatory body may impose certain regulatory requirements on a foreign guaranteed affiliate. However, the ODRG Principals did not indicate that they are reviewing when the guaranteed affiliate could be required to register in the guarantor’s jurisdiction (e.g., as a swap dealer).
Certain entities have revoked their cross-border guarantees in order to avoid foreign registration requirements for their foreign affiliates. If registration requirements for guaranteed affiliates are not addressed, more parent guarantees may be revoked, which could increase counterparty default risk.
- complications regarding unmasking: The ODRG delivered a letter to the Financial Stability Board (FSB) in August 2014 requesting that the FSB make a “clear and unambiguous” statement that jurisdictions need to remove all local privacy laws that prevent counterparties from complying with applicable reporting requirements (i.e., by preventing the counterparties from “unmasking” the identities of the counterparties).
Little progress appears to have been made on this front since then. As a result, reporting counterparties will continue to be required to decide between violating local reporting requirements or foreign privacy laws.