European Securities and Market Authority (ESMA) proposals to grant ‘conditional’ equivalence to market infrastructures from third-country jurisdictions may lead to short-term confusion but suggest a willingness to compromise.
Instead of granting or refusing recognition of third-country regulatory regimes whose OTC derivatives rules meet similar objects to the European markets infrastructure regulation, ESMA has recommended the European Commission grant ‘conditional’ equivalence. This will apply to countries across three areas: OTC derivatives clearing, central counterparties (CCPs) and trade repositories.
Speaking to theTRADEnews.com, Barnaby Nelson, head of client development, Asia for banks broker dealers and corporate issuers at BNP Paribas, said ESMA’s caveat could confuse the process.
“Earlier this year, the granting of equivalent status seemed a much more black and white issue at a jurisdictional level, but now ESMA has introduced the concept of ‘conditional equivalence’ which has created some ambiguity on what any final rulings will look like,“ Nelson said.
For CCPs, ESMA granted only Australia and Switzerland equivalency status, with conditional equivalence proposed for Hong Kong, Japan, Singapore and the US.
For central clearing requirements, conditional equivalence was recommended by ESMA for the US, and Japan. For trade repositories, only the US was recommended for conditional equivalence.
But despite uncertainty around the conditional rules, Nelson thought ESMA would be prepared to negotiate compromises to avoid inadvertently affecting the ability to do business.
“The language from ESMA over the past year as become increasingly conciliatory and it has stated it wants to protect the interests of European firms abroad in its rules. Ultimately, and based on evidence to date, the process of granting equivalent status to Asian jurisdictions will involve compromise.”
The Commission is expected to use ESMA’s technical advice to prepare possible equivalence decisions, whereby it may waive certain EMIR rules in favour of equivalent third-country rules.
In recent months, CCPs in Asia have scrambled to comply with EMIR, as many participants had not fully understood the implications of the European regulation. CCPs from third-countries that provide clearing services directly to EU-regulated clearing members will have to apply for registration with ESMA by 15 September.
Nelson said this deadline had spurred clearing houses in the region to prepare relevant documentation, although compliance with global clearing OTC derivatives guidelines from the International Organization for Securities Commissions (IOSCO) may aid this process.
“There is an expectation that compliance with IOSCO guidelines will have a significant impact on whether ESMA eventually recognises CCPS,” he said. “Given that most Asian CCPs have already focused on ensuring that they comply with the IOSCO guidelines this is seen as a positive sign in terms of likelihood of recognition,” he said.
In a statement, ESMA said its advice was based on assessments of each jurisdiction’s rules, taking into account possible consequences for EU entities and investors that equivalence decision might have.
ESMA will publish addition advice in October for Australia, Canada, Hong Kong, India, Singapore, South Korea and Switzerland.