Monday, September 16, 2013

ESMA advises European Commission that U.S. Derivatives Regulatory Regime is Broadly Equivalent to EMIR, but SEC-CFTC Funding Is a Concern

The European Securities and Markets Authority (ESMA) advised the European Commission that the SEC and CFTC have erected a broadly equivalent derivatives regulatory regime for central counterparties and trade repositories to that put in place by the EMIR. While describing the U.S. financial supervisory regime as a robust one with a significant track record and decades-long experience in financial markets, ESMA is concerned that neither the SEC nor the CFTC currently has sufficient funding, and the method of funding does not provide sufficient assurance of continuing funding levels, to be able to commit to long-term capital projects, such as building new market surveillance systems, which are necessary to keep pace with changes in the industry.

In conducting its equivalence assessment, ESMA used an objective approach, where the capability of the regime in the U.S. or any other third country to meet the objectives of EMIR is assessed from a holistic perspective. The European Commission is expected to use ESMA’s advice to prepare implementing acts concerning the equivalence between the legal and supervisory framework of the U.S. under EMIR. Where the Commission adopts such an implementing act, ESMA may then recognize a central counterparty or a trade repository authorized in the U.S. or other third country.

Entities providing clearing services as a central counterparty in the U.S. are required to be registered with either the SEC or the CFTC, or both, depending on the type of asset being cleared.

ESMA advised the Commission that central counterparties authorized in the U.S. are subject to effective supervision and enforcement on an on-going basis and that the U.S. legal framework provides for an effective equivalent system for the recognition of central counterparties authorized under third-country legal regimes. However, ESMA noted that U.S. authorities do not use the equivalent system on a long-term basis and highlighted to the Commission that in practice the U.S. authorities require that central counterparties authorized outside of the U.S. become subject to the direct jurisdiction of the SEC and CFTC and the application of two sets of rules. ESMA further noted that this represents a departure from the third country central counterparty regime prescribed in EMIR.

More specifically, ESMA advised the Commission that U.S. legal and supervisory arrangements ensure that central counterparties authorized in the U.S. comply with legally binding requirements which are equivalent to the requirements laid down in Title IV of EMIR in respect of central counterparties that have adopted internal policies, rules, and methodologies that constitute legally binding requirements and where they incorporate provisions which, on a holisitic basis, are broadly equivalent to the legally binding requirements for central counterparties under EMIR.

On this basis, ESMA would only grant recognition to central counterparties authorized in the U.S. which have in fact adopted internal policies and methodologies which, on a holistic basis, incorporate provisions that are broadly equivalent to the legally binding requirements for central counterparties under EMIR in the specific areas identified and where ESMA has assessed that the relevant internal policies and methodology do constitute legally binding requirements.

If a central counterparty authorized in the U.S. that was granted recognition by ESMA subsequently made changes to its internal policies and methodologies in a way which meant that it no longer complied with standards that were broadly equivalent to the legally binding requirements under EMIR, then that central counterparty would no longer qualify for recognition, and would be subject to the withdrawal of its recognition pursuant to Article 25(5) of EMIR.

Similarly, ESMA advised the Commission that trade repositories authorized in the U.S. comply with legally binding requirements which are equivalent to the requirements laid down in EMIR, where such trade repositories have adopted internal policies and methodologies that constitute legally binding requirements and where they incorporate provisions which are broadly equivalent to the legally binding requirements for trade repositories under EMIR in the areas of operational separation and collection of data on valuation and collateral.

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