Washington – We Have A Problem
The largely opaque nature of the G20 financial reform processes, together with the different time-frames for implementation, has resulted in confusion, uncertainty and an increasing demonstrable friction between national regulators.
By Doron Ezickson, Adam Topping & Ramona Simms
JUNE 2012 OFFERED the first serious insight into how international regulators intended to apply their new derivatives regulatory regimes to cross-border issues. On 29th
June 2012, the Commodity Futures Trading
Commission (CFTC) published its proposed guidance on the extraterritorial application of key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Earlier the same week, the European Securities and
Markets Authority (ESMA) published its consultation paper relating to the array of technical standards to be developed and implemented under the European Market Infrastructure Regulation (“EMIR”), including a summary of specific technical guidance that is being developed on the extraterritorial effect of EMIR. In parallel, although on different time-frames,
Japan, Australia, Canada, Hong Kong and Singapore (among others) are phasing in their own reforms to derivative markets. While several Dodd-Frank deadlines loom at year end, we still have no final guidance on cross-border issues from the CFTC. The comment periods for the CFTC guidance and the ESMA consultation paper both closed in August 2012. The largely opaque nature of these processes, together with the different time-frames for implementation, has resulted in confusion, uncertainty and an increasing demonstrable friction between national regulators. This was evident in the Global Markets Advisory Committee (GMAC) meeting hosted by the CFTC on November 7th
, 2012. Regulators from the EU, Japan,
Hong Kong, Australia, Singapore and others raised a number of serious concerns and strong objections to the CFTC’s approach to the implementation of Dodd- Frank’s extraterritoriality provisions. The unfolding regimes are imposing a number of
challenges to both commodity market participants and regulators. Market participants are faced with having to negotiate through this multitude of overlapping and often inconsistent rules, many of which are not even final but require implementation now. The regulators are faced with increasing concerns as to how to maintain the functionality of the market as a whole, ensuring that the new regimes are rolled out internationally in a coordinated way and do not drive
away participants and consequently hinder liquidity. The ability of regulators, particularly the CFTC and authorities in the EU, to resolve outstanding issues, and ensure the consistent application of derivatives rules, will be key to the orderly functioning and viability of derivatives markets going forward. The failure to do so to date is beginning to damage the market as a whole to the detriment of market participants and consumers alike.
It All Began in Pittsburgh ... The commitment to derivatives markets reform
sprang from the consensus among the G20 nations at the 2009 Pittsburgh summit. Given the global nature of these markets, it should be of no surprise that legislative initiatives towards such reforms taken by the US (in the form of Dodd-Frank) and the European Union (in the form of EMIR) create significant cross-border impact on the trading of derivatives.
The unfolding regimes are imposing a number of challenges to both commodity market participants and regulators
While Dodd-Frank and EMIR correlate to a large
extent, there remain significant differences in the rules as they currently stand. This creates risks for industry participants and for the commodity sector in particular.
Separated at Birth: Dodd-Frank & EMIR Given that the consensus among the G20 nations was
for trading in derivatives to be given greater stability, Dodd-Frank and EMIR have complementary provisions in a number of areas. These include:
• Mandatory clearing obligations for OTC derivatives, subject to similar criteria that regulators must
consider when determining if a particular type of contract should be cleared;
• Mandatory reporting obligations for OTC derivatives: under Dodd-Frank to registered swap
data repositories, and under EMIR to registered trade repositories (or to the relevant national regulator in certain circumstances);
• Under Dodd-Frank, there is a clearing exemption December 2012 13
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