[ by Howard Haykin ]

Leaders of regulatory authorities from around the world recently met to address issues relating to the regulation of over-the-counter (OTC) derivatives markets.  On Tuesday, the SEC's Office of International Affairs presented a joint statement on behalf of this leadership group which makes note of their findings and conclusion reach.  C-I presents key elements from this published statement.

Among those attending the meeting were the following regulatory leaders:  Belinda Gibson of the Australian Securities and Investments Commission, Otavio Yazbek of the Brazilian Comissao De Valores Mobiliarios, Jonathan Faull of the European Commission, Steven Maijoor and Martin Wheatley of the European Securities and Markets Authority, Keith Lui of the Hong Kong Securities and Futures Commission, Masamichi Kono of the Japanese Financial Services Agency, Howard Wetston and Mary Condon of the Ontario Securities Commission, Louis Morisset of the L'Autorité des marchés financiers du Québec, Chuan Teck Lee of the Monetary Authority of Singapore, Urs Zulauf of the Swiss Financial Market Supervisory Authority, Gary Gensler of the U.S. Commodity Futures Trading Commission, and Mary Schapiro and Elisse Walter of the U.S. Securities and Exchange Commission.

Leaders of authorities with responsibility for the regulation of the OTC derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States, met on 11/28/12 to discuss reform of the OTC derivatives market.

• The OTC derivatives market is a global market.
• The Group firmly supports the adoption and enforcement of robust and consistent standards in and across jurisdiction.
• Such standarsd will help further the G-20 regulatory reform agenda for OTC derivatives markets to mitigate risk, improve transparency and protect against market abuse, and to prevent regulatory gaps, reduce the potential for arbitrage opportunities, and foster a level playing field for market participants, intermediaries and infrastructures.
• Regualtory uncertainty must be reduced and market participants, intermediaries and infrastructures must be provided with with sufficient clarity on laws and regulations.
• The application of inconsistent and duplicative rules should be minimized.

• Complete harmonization - perfect alignment of rules across jurisdictions - is a noble objective, but one that is difficult to achieve because of jurisdictions' differences in law, policy, markets and implementation timing, as well as the unique nature of jurisdictions' legislative and regulatory processes.
• Ultimately, national authorities must protect against all sources of risk to their markets, and that statutory and regulatory requirements of each jurisdiction are core components of each respective market.  Legal systems and market conditions differ among jurisdictions and due account should be taken of such differences in determining the cross-border application of laws and regulations.

• These differences can result in conflicting or inconsistent cross-border application of rules, that may inhibit execution or clearing of certain cross-border transactions or impose additional compliance burdens. Additionally, regulatory gaps that arise can provide participants with the potential for regulatory arbitrage.
• It's therefore critical to identify conflicts, inconsistencies, and duplicative requirements and to continue discussing measures to ameliorate the challenges they raise.

The leadership group has agreed upon the following understandings, and has identified the following areas for further exploration.

1. Understanding on Clearing Determinations.   We agree to consult with each other prior to making any final determinations regarding which derivatives products will be subject to a mandatory clearing requirement. .....  and to continue to work together to define the process pursuant to which our respective authorities will consult in making mandatory clearing determinations.

2. Understanding on Sharing of Information and Supervisory and Enforcement Cooperation.   We agree to attempt to ensure that the relevant supervisory authorities:

• enter into supervisory cooperation arrangements with the relevant supervisory authorities to enable effective supervision and oversight of cross-border market participants, intermediaries and infrastructures and to ensure compliance by cross-border market participants, intermediaries and infrastructures with our respective statutory and regulatory requirements; and
• enter into bilateral enforcement cooperation arrangements based on the IOSCO Multilateral Memorandum of Understanding (MMOU) or enter into the IOSCO MMOU.

It's further agreed that authorities should have appropriate and effective access to such data as required to perform properly their mandates.

3. Understanding on Timing.   We recognize that differences in implementation dates may create gaps in regulations and uncertainty in the application of certain cross-border regulatory requirements, and may lead to risks to financial markets that are unaddressed, to regulatory arbitrage, and to an uneven playing field for market participants, intermediaries and infrastructures. Accordingly, we renew our efforts to implement quickly OTC derivatives reforms and in a manner consistent with an orderly implementation process in our respective jurisdictions.

This means facilitating an orderly transition with respect to new OTC derivatives regulatory requirements when promulgating regulations with cross-border applicability - requiring a reasonable, limited transition period to facilitate the implementation of such cross-border regulatory requirements in appropriate circumstances and in consultation with other jurisdictions.

4. Areas of Exploration - Scope of Regulation and Recognition or Substituted Compliance for Cross Border Compliance.   With regard to the different possible approaches to regulating persons, transactions and infrastructures with respect to cross-border activity when more than one set of rules applies, it is agreed that one or more of the following or different approaches should be considered, consistent with our respective statutory and other legal requirements:

• Recognition -    An authority could decide that market participants, intermediaries and infrastructures have substantially met some or all of its regulatory requirements if it determines that such entities are already subject to the regulation and oversight of another authority, which the first authority has recognized to be comparable or equivalent.

• Registration and Substituted Compliance -   An authority requiring all relevant market participants, intermediaries and infrastructures to register with it, could as part of the registration process, allow in certain circumstances for compliance with foreign regulations to substitute for compliance with otherwise applicable requirements.

In permitting the use of substituted compliance, the authority must first determine that the entities are already subject to comparable regulation, supervision and comprehensive oversight of compliance, by virtue of the fact that:

• the foreign regulation and oversight meet the same regulatory objectives; and
• (ii) the foreign regulator has the authority and means to support and enforce compliance by relevant foreign participants, intermediaries and infrastructures. It should be noted that in some jurisdictions' regulatory systems, this registration process is characterized as "recognition."

• Transactions and Substituted Compliance -   An authority could allow in certain circumstances for compliance with foreign regulations to substitute for compliance with otherwise applicable transaction-level requirements (i.e., requirements that apply regardless of registration status).

In permitting the use of substituted compliance, the authority must first determine that transactions are already subject to comparable regulation, by virtue of the fact that:

• the foreign regulation meets the same regulatory objectives; and,
• the foreign regulator has the authority and means to support and enforce compliance by relevant foreign participants, intermediaries and infrastructures.

• Registration Categories and Exemptions -   An authority could require market participants, intermediaries and infrastructures to register with it. Such authority may define different registration categories to provide such market participants, intermediaries and infrastructures the opportunity to comply with different sets of regulatory requirements, or the same regulatory requirements in different ways, based upon their characteristics and activities. This provides flexibility in oversight in instances where entities are already subject to comparable regulation and oversight by another authority. The authority also may elect to exempt certain market participants, intermediaries and infrastructures, from registration or other requirements, after taking into consideration such entities' existing obligations to other regulators.

These different approaches will not be undertaken on a firm by firm basis but rather will focus on the applicable regime in a jurisdiction and will entail a review of laws, rules, supervision and enforcement.

In support of these understandings and areas of exploration, we commit to regularly meet and consult with one another. We agree to next meet in Brussels in early 2013. Future meetings will address the following items:

• Options to address identified conflicts, inconsistencies and duplicative rules;
•  With respect to the basis for determinations of comparability of regulatory
  • Discuss expected regulatory outcomes with regard to the regulation of market participants, intermediaries, and infrastructures;
  • Identify possible standards, including relevant international standards, that will help to inform an assessment of whether a given regulatory regime achieves particular outcomes; and
  • Identify the types of arrangements, including supervisory and enforcement memoranda of understanding, that need to be entered into by each relevant supervisory authority.

5. International Engagement.  We support the continued development and setting of international standards by IOSCO and other standard setting bodies and intend to remain active in the various workstreams related to OTC derivatives. We support the efforts of the Financial Stability Board (FSB) in ensuring coordination among international standard-setting bodies. We further support the efforts of the FSB to promote the implementation of the G-20 regulatory reform agenda in the area of OTC derivatives regulation.

To access the complete joint statement, go to:  [SEC PR 12-251, 12/4/12].