Regulators urge swift equivalence fix

5 min read
Helen Bartholomew

Jurisdictions that signed up to the G20 agreement in Pittsburgh almost six years ago, could ease the path to cross-border harmonisation of swaps rules by adopting a default position of recognising each other’s regimes, as current methods being used to determine equivalence are not working, some regulators suggested at ISDA’s 30th Annual General Meeting in Montreal, Canada, earlier today,

“Given that the G20 had such a big impact, why not start with the default position that all of the G20 jurisdictions recognise each other unless they prove otherwise,” said SEC commissioner Michael Piwowar, speaking on a panel at the event earlier today.

“Moving on from there, you can add further jurisdictions until you get to 99% of the market.”

Cross border fragmentation is emerging as a result of a regional approach to new rules governing the US$691trn over-the-counter swaps market and is proving to be one of the biggest frustrations to market participants. Global regulators and policy makers are also beginning to lose patience with ongoing quibbles over individual rules that are hampering what they believe should be an outcomes-based approach to the intent of the G20 agreement.

“The fact that the two largest regions are still arguing over things that should be trivial, is embarrassing for global harmonisation,” said Kay Swinburne, Member of the European Parliament, speaking on a panel discussion of global regulators and policy makers.

“It’s not acceptable that five years on we still can’t get recognition of CCPs. CCPs operate at a global level and it’s not acceptable to market participants or investors.”

Speaking to journalists after the panel, Swinburne noted her confidence that a recognition of the US CCP regime would be made by the European Union in the coming weeks, despite the fact that policy makers will vote on Friday to extend the deadline for an equivalence ruling until December, as reported by IFR earlier this week.

“The deadline for recognition is June, so extending the relief is simply a fail-safe until a solution is found, but I’m confident that will happen by the summer,” she said.

With substituted compliance – the method through which US regulators recognise foreign regimes – falling short of achieving the global ambitions of the G20, Swinburne concurred with Piwowar’s default recognition suggestion, noting that such a regime already exists across the European Union, where 28 member states are trusted to impose equivalent rules.

“Whenever I hear about substituted compliance, I’m just not sure that we’re at a stage where states do trust each other, but I’m becoming more inclined to think it should be accepted other jurisdictions are recognised until they can prove otherwise. Ultimately the outcome is going to be the same.”

Growing frustration with the slow pace of cross border recognition was in clear evidence on the lively panel debate. Masamichi Kono, vice minister for international affairs for Japan’s Financial Services Agency noted the need to pay due respect to home country regimes, and believes that a combination of short and longer-term approaches are required to address the problem.

“In the short term, we don’t have any choice – regulators just have to get on with it as the process is taking too much time and is more complex than necessary,” he said on the panel.

“In the future, it really should work on a kind of passport – not necessarily the same as the EU passport, but if we don’t have some sort of passporting solution, we will still be arguing over differences across jurisdictions that just won’t go away.”

Fragmented liquidity

According to a study by ISDA, the lack of harmony and the regional manner with which swaps rules have been implemented, is already taking its toll, with swap market liquidity showing signs of fragmentation across geographic lines.

The study shows that an increasing portion of volume in euro interest rate swap markets is being transacted between exclusively European counterparties and the trend coincides with the introduction of the swap execution facility regime under Dodd Frank in the US.

During the fourth quarter of 2014, almost 88% of total euro IRS volume was transacted between European dealers, compared to just 73% during the third quarter of 2013, before the SEF trading obligation got under way.

“Fragmentation means less liquidity, less choice and, ultimately, higher costs for end users,” said ISDA CEO Scott O’Malia. “It’s important that regulators coordinate and cooperate to eliminate inconsistencies in their rules and ensure derivatives end users can tap into deeper liquidity pools.”

SEC Commissioner Michael Piwowar