Unified global FX market a step closer? ODRG report details issues relating to cross-border ruling

International law makers issue report on cross-border issues on OTC derivatives following G20 summit during which widespread agreement was reached

The European Securities and Markets Authority (ESMA) continues to demonstrate its commitment to participation in the worldwide governmental effort to ensure compatibility between all financial markets worldwide with regard to the regulatory oversight of OTC derivatives.

Spearheaded by the United States as part of the Dodd-Frank Wall Street Reform Act which was fully implemented during the latter six months of 2013, a worldwide drive toward ensuring that OTC derivatives can be provided to an international audience from whichever region is chosen by a retail client or commercial trading desk and yet conform to a standardized set of rulings suited to electronic trading’s in-the-ether nature.

The OTC Derivatives Regulators Group (ODRG) has today released a report on the issues which are faced regarding cross-border regulation of off-exchange derivatives, and consists of senior officials within the Australian Securities and Investment Commission, the Brazilian Comissao de Valores Mobiliarios, the European Commission (EC), the ESMA itself, the Hong Kong Securities and Futures Commission, the Japanese Financial Services Agency (JFSA), the Ontario Securities Commission (OSC), the Autorité des marchés financiers du Québec (AMF), the Monetary Authority of Singapore
(MAS), the Swiss Financial Market Supervisory Authority, the US Commodity Futures Trading Commission (CFTC), and the US Securities and Exchange Commission (SEC). For the OSC, CFTC and SEC, references to “Principals” and “ODRG members” are to the Chairs of their respective agencies and not the full bodies.

The provincial Canadian regulatory authorities have been the most recent to pledge their commitment, having signed a memorandum of understanding with the CFTC last week.

According to the report, the G20 leaders initially welcomed the set of understandings of the ODRG Principals on cross-border issues relating to OTC derivatives reforms presented at the St. Petersburg summit in September 2013 as a “major constructive step forward for resolving remaining conflicts, inconsistencies, gaps and duplicative requirements.”

At that particular time, the G20 Leaders agreed, with further support from the G20 Finance Ministers and Central Bank Governors which later reaffirmed that “jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, in a non-discriminatory way, paying due respect to home country regulatory regimes.” The G20 leaders also called on regulators to “report on their timeline to settle the remaining issues related to overlapping cross-border regulatory regimes and regulatory arbitrage.”

The ODRG considers organized trading platforms and implementation of trading commitment to be an issue of priority. This means that some jurisdictions have moved to register organised trading platforms and further implement the G20 commitment to trade all standardized OTC derivatives contracts on organised trading platforms, where appropriate, through mandatory trading requirements, issues have arisen with regard to the potential for liquidity fragmentation along jurisdictional lines.

The current status relating to the ODRG’s assessment of these circumstances is that it is considering the circumstances under which registration of foreign organised trading platforms, for purposes of derivatives trading and trading obligations, is required by authorities, and identifying possible approaches to the application of substituted compliance or equivalence to organised trading platforms. In addition, the ODRG is considering differences across jurisdictions in timing and approach to implementation of trading obligations.

Great steps have been taken in the United States to ensure that all institutional FX firms utilize trade repositories via a central counterparty, thus creating great transparency as to how prices were achieved and to the entire details regarding an executed trade. Europe, Hong Kong and Singapore have followed suit, however there are barriers, including data protection laws, blocking statutes, state secrecy laws and bank secrecy laws, which can prevent reporting to trade repositories.

Barriers to reporting in certain jurisdictions will continue to affect the effectiveness of reporting obligations unless these barriers are removed.

ODRG members agreed that jurisdictions should remove barriers to reporting to trade repositories by market participants with particular attention to removing barriers to reporting counterparty data.

The ODRG considers that these barriers should be removed so that participants can report trades with foreign counterparties pursuant to the participants’ reporting requirements and without breaching applicable laws. ODRG members do not believe providing exemptions to participants from reporting information to trade repositories concerning foreign counterparties (e.g., on the basis that reporting is restricted by foreign law) is an acceptable arrangement, other than on an interim basis.

Currently, the Financial Stability Board’s (FSB) OTC Derivatives Working Group is reporting on the progress by each FSB member jurisdiction to remove such barriers. Advancements in this regard have been reported in the OTC Derivatives Market Reforms – Progress Report on Implementation published by the FSB on a half-yearly basis. Furthermore, the FSB will conduct a peer
review on trade reporting, which will aim to obtain a better understanding of the outstanding issues across jurisdictions.

The ODRG confirmed that it will continue to monitor progress on this issue.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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