The Alternative Investment Management Association (AIMA), the hedge fund industry association, has produced a paper that highlights the key areas where deeper coordination of over-the-counter (OTC) derivatives regulation is required to achieve the G20 objective of maintaining global markets.
The paper, “Addressing overlaps between EMIR and CFTC OTC derivatives regulation”, provides examples of potential regulatory conflicts or unnecessary overlap between the European Markets Infrastructure Regulation (EMIR) and the CFTC’s derivatives rules in a number of key areas including clearing obligations, reporting obligations, segregation rules, collateral rules and margin requirements.
AIMA says in the paper that, if untreated, some of the conflicting rules may prevent counterparties from complying with either regime, leading to market fragmentation along geographical boundaries. AIMA says these effects could be mitigated for cross-border transactions by firms being allowed to follow the rules of the jurisdiction of one, rather than both counterparties to a transaction under a concept known as “substituted compliance” in the US or “equivalence” in the EU.
In the US and Europe, the CFTC, the US Securities and Exchange Commission and the European Commission, respectively, will soon determine the scope of their derivatives regulatory regime with respect to cross-border transactions. These decisions which will address the scope of substituted compliance and equivalence recognition will have a significant impact on the nature of the global derivatives market.
Andrew Baker (pictured), AIMA chief executive, says: “AIMA strongly supports efforts to promote central clearing of OTC derivatives and to reduce systemic risk, and we appreciate the difficult task that regulators in each jurisdiction face in completing their separate OTC derivatives regulations in a prompt and thorough manner, while also ensuring that those regulations are, as far as possible, consistent with regulations being finalised and implemented by other regulatory authorities.
“However, we are concerned that OTC derivatives transactions could be subject to unnecessarily duplicative – or even conflicting – requirements as a result of extra-territorial application of domestic rules. The good news is that the regulatory authorities have the tools at their disposal to ensure we avoid market fragmentation and they are mindful of some of the potential negative consequences of uncoordinated action. We hope that, by highlighting the key examples of potential problems, our paper contributes to the current intensive international regulatory dialogue.”