Mounting confusion over so-called “third-country” requirements in European derivatives legislation has prompted a revival in the idea of forging a “mutual recognition” regime between US and EU regulators.
A coalition of trade associations including the Futures & Options Association has commissioned Clifford Chance, the law firm, to study the viability of mutual recognition as a way of dealing with the problem, according to Anthony Belchambers, FOA chief executive.
Banks, so-called buy-side institutions, exchanges and clearing houses are concerned over requirements that financial services businesses in non-EU countries be recognised on the basis of their home country’s “equivalence” with EU regulations – as laid out in a proposed new version of the Markets in Financial Instruments Directive.
Equally, confusion reigns over whether a non-EU bank would have to set up a branch in the EU if it wanted to become a member of a clearing house based In the region.
There also confusion over how financial institutions operating globally would comply with the Dodd-Frank Act, Emir, Mifid and legislation in Asia.
Bankers say for example that definitions such as “a US entity” and “European entity” for the purpose of complying with G20 rules is not clear. “What happens if a US person trades with a Japanese person, whose regulation applies?” said one US banker.
The study has been jointly commissioned by the FOA; the Securities Industry and Financial Markets Association (Sifma); the Association of Financial Markets in Europe (Afme); the International Swaps and Derivatives Association (Isda); the American Bankers Association Securities Association; the British Bankers Association; the Investment Industry Association of Canada; and the Swiss Bankers Association; the Bankers’ Association for Finance and Trade; the Futures Industry Association; the Swiss Bankers Association; and the International Capital Market Association (Icma).
Mutual recognition is a system under which regulators in different jurisdictions would agree to recognise each other’s regulatory regimes as of sufficiently comparable standard – although not necessarily strictly equivalent. That way, financial institutions operating in both would not need to get approvals from each, every time they wanted to carry out business.
Regulators would not have to double up on decisions domestically either.
Mr Belchambers said: “In order to ensure we were not going to increase legal risk and compliance complexity we felt it was important to re-energise the dialogue for mutual recognition, recognising that the basis for it may be a different since the crisis.”
He said it would also help avoid regulators retreat into “regulatory protectionism”.
Bankers and lawyers say the third-country provisions in Emir are the single biggest sticking point in getting the legislation completed.
Simon Gleeson, partner at Clifford Chance working on the study, said: “The third party issue is the biggest worry. The objective of our study is to re-open the issue of mutual recognition, with the potential big win for regulators being the abolition of duplication.”
Leonard Ng, a partner at Sidley Austin, a US law firm, said the issue was “very high up on the agenda”, adding that the two issues complicating market structure regulatory reform were the third-country issue and the powers of the year-old pan-European regulator, the European Securities and Markets Authority.
The idea of mutual recognition was originally floated in an article co-authored in the Harvard International Law Journal by Ethiopis Tafara, head of the office of international affairs at the US Securities and Exchange Commission, and a colleague, in 2006.
It was enthusiastically taken up by then-SEC chairman Christopher Cox, and by former EU commissioner for financial markets, Charlie McCreevy. But the idea was shelved when the financial crisis hit in 2008.
Its re-emergence comes as US and EU regulators are trying to find ways to iron out differences between Dodd-Frank, Emir and Mifid so that market participants have a clear idea of how to comply on a global basis. Mr Tafara is heavily involved in that effort at the SEC.
Mr Ng said Brussels was considering the introduction of “omnibus” legislation that would pull together key elements of Emir, Mifid and other initiatives as a way of streamlining the pipeline of regulations.
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