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FSB`s map for OTC deference maze

On 18 September 2014, the FSB published a report on “Jurisdictions’ ability to defer to each other’s OTC derivatives market regulatory regimes”. The FSB member jurisdictions were asked by the FSB Chairman to unlock the secrets of each other`s framework for making equivalency or comparability decisions on matters such as trade reporting, central clearing and exchanges or electronic trading platforms.

14 out of 19 jurisdictions confirmed they had some capability to defer to foreign OTC derivatives requirements. The 5 remaining jurisdictions (Argentina, Brazil, China, India and Indonesia) indicated that the early stage of development of their OTC derivatives market, with little cross-border activity, did not call for an equivalence framework yet.

The process of coming to a determination typically involves engaging foreign jurisdictions in detailed dialogue about their respective regulatory regimes. An “outcome based” approach is preferred over a mechanical, “identical rules” one.

Nonetheless, the report reveals differences in approaches and perspectives with regard to deference. The current paradigm results in backlogs for equivalence decisions, sometimes caused by a “you show me yours…” rationale. Only a small number of jurisdictions have to date made determinations of equivalence and are already deferring to other jurisdictions.

Studying the different regulatory regimes is a bit like studying twins reared apart. Although they all come from the same international standards setters such as FSB, IOSCO or BCBS, each national regulation develops its distinct character. Sometimes, the gap is so large that international setters raise an eyebrow. For instance, ESMA was recently compelled to close ranks concerning its supervision of CCPs: its regulation was not in line with the CPSS-IOSCO principles for market infrastructure (PFMI).

Now may be a good time for the FSB to bring the exercise to its logical conclusion and push for international principles on deference.

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