Report of the OTC Derivatives Regulators Group (ODRG)i to G20 Leaders
on Cross-Border Implementation Issues
November 2015
Background
Jurisdictions have been implementing the G20s OTC derivatives reform agenda through
legislative and regulatory action. Since 2011, the ODRG has sought to identify and resolve crossborder issues associated with this implementation.
In this report, the ODRG updates the G20 Leaders since the ODRGs report from November
2014ii on how the ODRG has addressed or intends to address a number of identified cross-border
issues.
A focus of the ODRG has been the issue of deference in the context of central counterparties
(CCPs), in line with the G20 Leaders St. Petersburg and Brisbane declarations. There has been
further substantial progress in implementing OTC derivatives reforms within ODRG
jurisdictions, and continued bilateral progress in addressing cross-border issues amongst them.
CCP Deference
The ODRG has focused on addressing deference in the context of CCPs in view of the
importance of CCPs in the global OTC derivatives markets. Annex A of this report is a paper on
deference in the context of CCPs.
Monitoring of Substituted Compliance and Equivalence Assessments
The ODRG agreed that monitoring of substituted compliance and equivalence assessments is
necessary to ensure these assessments and determinations remain up-to-date, and the sharing of
information on legal or regulatory changes is essential to such monitoring.
ODRG members should share information about legal or regulatory changes to help to ensure
that existing substituted compliance or equivalence determinations are kept up-to-date. ODRG
i
The ODRG includes Principals of the following regulatory authorities with responsibility for regulation of overthe-counter (OTC) derivatives markets: the Australian Securities and Investments Commission (ASIC), the Brazilian
Comissao de Valores Mobiliarios, the European Commission (EC), the European Securities and Markets Authority
(ESMA), the Hong Kong Securities and Futures Commission (SFC), the Japanese Financial Services Agency
(JFSA), the Ontario Securities Commission (OSC), the Autorit des marchs financiers du Qubec (AMF), the
Monetary Authority of Singapore (MAS), the Swiss Financial Market Supervisory Authority, the U.S. Commodity
Futures Trading Commission (CFTC), and the U.S. 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. This report should not be read as reflecting a judgment by, or limiting the choices of, the
participating authorities with regard to the content of their proposed or final versions of their relevant rules or
standards, nor their timing of implementation.
ii
See Report of the OTC Derivatives Regulators Group (ODRG) to G20 Leaders on Cross-Border Implementation
Issues, November 2014
http://www.cftc.gov/ucm/groups/public/@internationalaffairs/documents/file/oia_odrgreportg20_1114.pdf.
members should also share experiences from undertaking substituted compliance and
equivalence assessments and the monitoring of such assessments.
Cooperation on Clearing Obligation Mandates
ODRG members previously agreed to a framework for consulting one another on mandatory
clearing determinations, with the aim of harmonizing mandatory clearing determinations across
jurisdictions to the extent practicable and as appropriate, subject to jurisdictions determination
procedures. Inconsistent clearing mandates across jurisdictions may create the potential for
regulatory arbitrage. ODRG members are considering ways to enhance the existing framework
for such cooperation.
Other Work Previously Identified
As part of its work on addressing regulatory conflicts, inconsistencies, gaps and duplicative
requirements in the treatment of branches in cross-border situations, the ODRG has discussed the
application of rules to branches of financial institutions that operate across multiple jurisdictions.
As a result of this work, ODRG members have a fuller understanding of the regulation of the
cross-border activity of branches which will assist them in addressing these issues on a bilateral
basis.
Continued progress in addressing cross-border issues among ODRG jurisdictions:
Following the four equivalence decisions made by the EC in October 2014 (and referenced in
last years report) with respect to the regulatory regimes for CCPs for Australia, Hong Kong,
Japan and Singapore, ESMA has signed the related Memoranda of Understanding (MOUs) with
the relevant authorities from these countries. The MOUs were instrumental in enabling ESMA to
recognise eleven CCPs established in these four countries. The four MOUs signed by ESMA
were:
In November 2014, ESMA, ASIC and the Reserve Bank of Australia signed an MOU.
In December 2014, ESMA and the SFC signed an MOU.
In February 2015, ESMA and the JFSA signed an MOU.
In February 2015, ESMA and MAS signed an MOU.
In February 2015, the OSC published amendments to its OTC derivatives trade reporting rule
(OSC Rule 91-507) to permit certain market participants subject to Ontario trade reporting
obligations to benefit from substituted compliance when they report trades pursuant to European
Union (EU) trade reporting rules. The OSC conducted a comparability analysis using an
outcomes-based approach to determine whether the EU rules and regulations are sufficiently
equivalent for the purposes of the substitute compliance provision of OSC Rule 91-507.
In February 2015, the SEC adopted rules related to security-based swap regulatory reporting and
public dissemination (Regulation SBSR) and rules related to trade repositories (TRs), including
rules that established a procedure for requests for substituted compliance for foreign regulatory
regimes for reporting and public dissemination requirements.
In August 2015, the SEC adopted new rules to provide a comprehensive process for securitybased swap dealers and major security-based swap participants (collectively SBS entities) to
register with the SEC, including provisions for non U.S. SBS entities.
In August 2015, the CFTC issued an order of exemption from registration as a derivatives
clearing organization to ASX Clear (Futures) Pty Limited, based in Australia. Subject to the
terms and conditions of the order, ASX is permitted to clear proprietary swap positions for U.S.
persons that are clearing members or clearing member affiliates.
In October 2015, the CFTC issued an order of exemption from registration as a derivatives
clearing organization to Japan Securities Clearing Corporation (JSCC), based in Japan. Subject
to the terms and conditions of the order, JSCC is permitted to clear proprietary swap positions
for U.S. persons that are clearing members or clearing member affiliates.
In November 2015, the SFC and ESMA reached an agreement on an MOU on cooperation
arrangements for the exchange of information related to the information on derivative contracts
held in TRs established respectively in Hong Kong and in the EU. This is to enable the SFC and
ESMA both to have indirect access to the information on derivative contracts that they need to
fulfil their responsibilities and mandates.
ANNEX A
Forms of Deference in ODRG Jurisdictions with Respect to Central Counterparties
1. At the St. Petersburg Summit in September 2013, the G20 Leaders agreed 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.1
2. Since the St. Petersburg Summit, the OTC Derivatives Regulators Group (ODRG)
members2 have continued to engage with the issues of regulatory and supervisory
deference in OTC derivatives reform, particularly in light of the G20 November 2014
Declaration calling on regulatory authorities to make further concrete progress in swiftly
implementing the agreed G20 derivatives reforms.3 In the context of its work to
implement understandings in the area of equivalence and substituted compliance, the
ODRG has been considering how deference to foreign regimes may work in practice.
3. The ODRG members have committed to avoid, to the extent possible, the application of
conflicting rules to the same entities and transactions. The members also have
acknowledged, in implementing their individual requirements, the desire to eliminate the
application of inconsistent and duplicative requirements.4 Deference has been identified
by the G20 Leaders as a tool that authorities may use to help make reforms across
jurisdictions interact better and facilitate the meeting of the objectives of the reforms.5
G20 Leaders Declaration, September 2013, St. Petersburg at para. 71, available at https://g20.org/wpcontent/uploads/2014/12/Saint_Petersburg_Declaration_ENG_0.pdf.
2
The ODRG includes Principals of the following regulatory authorities with responsibility for regulation of overthe-counter (OTC) derivatives markets: the Australian Securities and Investment Commission, the Brazilian
Comissao de Valores Mobiliarios, the European Commission, the European Securities and Markets Authority, the
Hong Kong Securities and Futures Commission, the Japanese Financial Services Agency, the Ontario Securities
Commission (OSC), the Autorit des marchs financiers du Qubec, the Monetary Authority of Singapore, the
Swiss Financial Market Supervisory Authority, the U.S. Commodity Futures Trading Commission (CFTC), and the
U.S. Securities and Exchange Commission. For the OSC, SEC and CFTC, references to Principals refers to the
Chairs of their respective agencies, and not to the full bodies.
3
The G20 Leaders noted in their November 2014 Declaration, [w]e call on regulatory authorities to make further
concrete progress in swiftly implementing the agreed G20 derivatives reforms. We encourage jurisdictions to defer
to each other when it is justified, in line with the St Petersburg Declaration. See, G20 Leaders Communique,
November 2014, Brisbane, available at https://g20.org/wpcontent/uploads/2014/12/brisbane_g20_leaders_summit_communique1.pdf .
4
See, ODRG Report on Agreed Understandings to Resolving Cross-Border Conflicts, Inconsistencies, Gaps and
Duplicative Requirements, August 2013, available at
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/odrgreport.pdf.
5
G20 Leaders Declaration, September 2013, St. Petersburg supra, note 1.
4. The ODRG members have been working on practical aspects of deference, building on
the survey work of the FSB, by drawing out themes and identifying potential common
approaches. The ODRG has focused on delineating and describing forms of deference in
the context of central counterparties (CCPs) in view of the importance of CCPs in the
global OTC derivatives markets.
5. ODRG members have developed a greater appreciation of, and respect for, differences in
legal authority, policy objectives, and approaches to the application of deference. The
ODRG members have a fuller understanding and acceptance of the forms of deference
that could be applied; nevertheless, these differences limit the ability to agree on a
common approach regarding whether and how deference should be used. Therefore, this
paper does not prescribe or endorse a particular model or framework.
Approaches to Deference
6. Deference in some jurisdictions is understood to be the full or partial reliance on another
jurisdictions regulatory and/or supervisory framework. In other jurisdictions, deference
is understood to mean that an entity may comply with home jurisdiction6 requirements
that are comparable and comprehensive as a substitute for compliance with host
jurisdiction requirements. However, deference must also be consistent with an authority's
objectives and legal responsibilities. In some jurisdictions, for example, it may not be
legally permissible under national requirements to provide for deference in certain
situations. While some authorities may choose to defer to the home authority, this should
not mean that all authorities must do so. Some members noted that the application of
some forms of deference may not be consistent with all the objectives of the OTC
derivatives reforms. Each authoritys duty to carry out its own objectives and legal
responsibilities comes first.
7. Differences in approaches to deference among jurisdictions can be understood on a
spectrum. At one end of the spectrum, the host jurisdiction may grant full deference to all
relevant aspects of the home jurisdictions regime including relying on the home
jurisdictions licensing and registration, disapplication of host jurisdiction rules in favor
of home jurisdiction rules, and reliance on home jurisdiction day-to-day oversight,
general supervisory oversight, and reporting requirements. At the other end of the
spectrum, the host jurisdiction may grant no deference, requiring direct compliance with
its rules and conducting its own comprehensive oversight of CCPs operating across
multiple jurisdictions. In between, there is a range of deference arrangements in which
6
This paper discusses deference from the perspective of a host authority of a cross-border entity that is
considering whether, and if so, to what extent, to exercise deference to the authority in the entitys home
jurisdiction.
host jurisdictions may grant partial deference with respect to a full or limited set of rules
and requirements using a range of processes and/or retain certain direct supervisory
oversight practices. Within the ODRG, with respect to supervision of CCPs, most host
authorities retain supervisory authority; however, some host authorities may not be able
to monitor or oversee foreign CCPs as closely as domestic CCPs and may choose to rely
on the home authority in practice for day-to-day supervision. Two ODRG jurisdiction
regimes permit or will permit complete disapplication of their supervisory authority in
favor of a CCPs home supervisory authority.
8. Common features of deference frameworks include the following:
Strong safeguards to protect the ability of the home and host authorities to carry
out their legal and/or supervisory responsibilities and ensure that the home
authority is carrying out its responsibilities appropriately.
Cooperation among authorities (including between home and host authorities).7
Flexibility, so that the model appropriate for a jurisdiction may be applied with
respect to (a) different jurisdictions legal frameworks and (b) different CCPs
(e.g. an authority may determine that a specific CCP may have a distinct systemic,
market or other importance compared to other CCPs in its jurisdiction).
Comparable rules with similar regulatory outcomes will often need to be in place.
9. While the group recognizes that some members of the ODRG may choose to exercise
deference in certain contexts, it is understood that all members must decide such issues
depending on the context of application and their respective domestic market conditions,
regulatory and supervisory framework for CCPs, legal constraints and policy preferences.
Of those jurisdictions that choose to exercise deference, some apply broad deference of
substantive regulations, supervisory practices and supervisory authority and some apply a
deference model that involves deference with respect to certain substantive regulations
and/or some supervisory practices and/or supervisory authority. One member does not
currently have available means or authority to exercise deference with respect to CCPs at
all. As agreed previously by the ODRG, [a]n equivalence and substituted compliance
assessment should fully take into account international standards, where they are
appropriate, regulatory arbitrage, investor protection, risk importation, prudential and
other relevant considerations.8
The group recognizes that Responsibility E of the CPMI-IOSCO Principles for Financial Market Infrastructures
sets out the international standards for cooperation of authorities with respect to financial market infrastructures,
including CCPs.
8
See Report of the OTC Derivatives Regulators Group (ODRG) to G20 Leaders on Cross-Border Implementation
Issues, November 2014, available at
http://www.cftc.gov/ucm/groups/public/@internationalaffairs/documents/file/oia_odrgreportg20_1114.pdf
Forms of Deference
10. The following forms of deference, which memorialize some existing practices of ODRG
members, is designed to be neither exhaustive nor prescriptive and is premised on a
jurisdiction having the means or authority to do so.
Registration and Recognition Processes
11. In some circumstances, an authority may use a registration/authorization framework, and
may offer the possibility of substituted compliance in connection with certain
requirements applicable to the registered/authorized entity. In some other circumstances,
an equivalence and recognition framework may be used or a combination thereof.
Authorities also may defer through the use of registration categories or exemptions. In a
registration and substituted compliance situation, the host authoritys substantive
requirements would still apply, but a CCP may comply with such requirements through
the requirements of the home authority.9
Consideration of the Significance of the CCP and/or the Market, and Other
Considerations
12. When determining whether deference should be exercised, host authorities may consider
the context and circumstances of the particular CCP. In deciding whether and to what
extent to defer, authorities may choose to take into consideration, among other things, the
significance of the CCP to the market or conversely, the significance of the market to the
CCP (i.e., if a CCP does a large portion of its business in a host jurisdiction), or some
combination of these considerations.
13. Some authorities may choose to apply a higher level of deference where the relevant
entity has a lower impact in, or nexus to, the host country's market. For example, some
authorities may apply a de minimis threshold, whereby full or partial deference is
provided for an entity that is below a certain level of systemic, market or counterparty
risk significance. Alternatively, some authorities may take a more graduated approach
with multiple thresholds, where the level of deference increases as the level of
significance decreases, which could reduce reliance on the supervisory resources in the
host country without endangering its financial stability or its market or counterparty
protections. Where the host jurisdiction is less exposed to such risks, the host authority
could determine that the level and scope of oversight may be correspondingly different or
less than for a CCP which poses a higher level of risk to the host jurisdiction.
Definitions of substituted compliance may vary with respect to how the compliance is measured and the allocation
of responsibility for enforcement if compliance is not achieved.
14. In addition, some members noted that supervisory and regulatory resources and the
practical difficulties of regulating a foreign entity are also contributing factors in
determining whether, and if so, to what extent, to defer to a foreign CCPs home
regulatory or supervisory regime to regulate or supervise the foreign CCP. Moreover, in a
highly mobile, global market, determination of the risk that activity in a particular
jurisdiction poses can quickly become outdated.
Information Requirements
(a) Regulatory Reporting Requirements
15. All regulators require reports from CCPs that are registered, recognized or authorized
with them. These reports may concern information on arrangements, strategies, processes
and mechanisms implemented by CCPs to verify compliance and to evaluate the risks to
which CCPs are exposed. Different jurisdictions have varying requirements for
information. Some host jurisdictions may accept reports in compliance with home
country requirements while other host jurisdictions will require reports that differ from
the home jurisdictions requirements. Moreover, authorities may prefer to retain their
rights to request and receive information directly from CCPs rather than through another
regulator, even in situations where they may be willing to consider some deference to
another regulators rules.
(b) Receipt or Exchange of Information
16. Regulators may also consider their ability to receive information from CCPs or exchange
information with other authorities. This may include how reporting between authorities
and CCPs they supervise will occur, and exchange of business as usual regulatory
information between home and host authorities. This may also include deciding on the
proper means for receiving or exchanging information about unanticipated business and
market developments, including during times of market stress. The mechanism for this
may be set out in a memorandum of understanding, a colleges terms of reference, or the
regulatory conditions for the CCP in individual jurisdictions. The outcome of these
procedures should be that all regulators are fully apprised of information that impacts
their ability to fulfil their statutory duties. For example, if moments of stress trigger
enhanced reporting obligations on the part of the CCP, regulators should consider how
they would expect to receive and/or share this information in contemplating a deference
arrangement. The flow of information should be such that there is no significant risk of
important market or financial data or information affecting the resilience of a CCP not
being provided to both authorities in a timely manner. Measures to communicate early
warning signs of systemic, market or counterparty risk should be considered prior to a
deference determination to allow host authorities to attempt to control or limit the impact
of the risk.
Surveillance and Monitoring
17. A host authority may make different choices as to how to ensure that a CCP is compliant
with all applicable rules. A host authority may not wish to defer unless it can ensure that
activities within the host jurisdiction are appropriately supervised by the home authority.
It may be more difficult for the host authority to be comfortable that the home authority is
properly supervising the entity's presence in the host jurisdiction, partly because the home
authority may not have sufficient knowledge of the host market. A host authority may
determine that the disapplication of its requirements can be monitored and assessed
through the equivalence process (if applicable) through which the host authority can
evaluate the quality of supervision of the home authority. This may be done, for example,
by using questionnaires to authorities or publicly available sources on the quality of
supervision (including dedicated supervisory resources) of the home authority.
Additionally, a host jurisdiction may choose not to defer monitoring and inspection of the
CCP to the home jurisdiction but will conduct its own on-site inspections to evaluate
compliance with the host jurisdictions requirements on terms to be determined between
the home and host jurisdictions and possibly the relevant CCP.
Registration Applications and Changes to Service or Product Offerings, Rules and Risk
Management
18. Regulators whose regimes require registration/recognition will typically require the
relevant CCP that is applying for registration/recognition to provide to the host authority
information that would substantiate that the CCP is in compliance with the host
authoritys requirements. In doing so, some host authorities may rely on information
already provided to the home authority.
19. When a CCP makes changes to its service offering, product offering, rules or risk
management, an authority that has extended some form of deference must determine the
extent to which it will evaluate such changes and, if applicable, the proper process to
evaluate and, if appropriate, to recognize such changes. The host authority may decide to
not undertake the full registration/recognition process, provided that the change sought
stays within the bounds set by the host authoritys initial authorisation. Some authorities
may wish to retain a more comprehensive independent right of review. Other authorities
may require the CCP to go through the registration/recognition process again when
significant modifications are made to its service offering, product offering, rules, and risk
management. Most authorities require specific reporting on business developments, for
example when significant changes are made to risk management models and parameters.
If a change goes outside the scope of initial registration/recognition by the host authority,
most host authorities would require their approval of the change. In other cases, some
host authorities may defer entirely to the home jurisdiction or require only notice of the
change.
College Arrangements
20. Some CCPs have global college arrangements and some other CCPs may have college
arrangements established at a future point in time. Membership in a global college may
help a host authority to be more willing to consider deference. Mechanisms, such as
licencing conditions, and direct access to the CCPs books and records, may need to be in
place to ensure adequate supervision by the host authority. This need may be more or less
pronounced depending on the nature of the global college and whether the authority is
outside the college structure.
Memoranda of Understanding (MoUs)
21. There are currently a significant number of supervisory MoUs in existence between
ODRG members relating to consultation and cooperation in the oversight of globally
active CCPs. Many of these MoUs commonly include provisions such as those on
exchange of information, notification of regulatory actions or sanctions and enforcement
actions, cooperation with on-site inspections, confidential safeguards on use of
information, and consultation and meetings or calls between the regulators.
