04 December 2012

ESMA: Operating principles and areas of exploration in the regulation of the cross-border derivatives market

Leaders recognise that the OTC derivatives market is a global market and firmly support the adoption and enforcement of robust and consistent standards in and across jurisdictions. This will help further the G20 regulatory reform agenda for OTC derivatives markets to mitigate risk, improve transparency and protect against market abuse, and to prevent regulatory gaps, reduce the potential for arbitrage opportunities, and foster a level playing field for market participants, intermediaries and infrastructures. Leaders further recognise the need to reduce regulatory uncertainty and provide market participants, intermediaries and infrastructures with sufficient clarity on laws and regulations by avoiding, to the extent possible, the application of conflicting rules to the same entities and transactions. They also acknowledge the need to take into account, among other factors, minimising the application of inconsistent and duplicative rules.

It is clear that coordination among jurisdictions regarding the regulation of cross-border activities should facilitate the implementation of the objectives of the G20 regulatory reform agenda for the OTC derivatives market. However, complete harmonisation – perfect alignment of rules across jurisdictions – is difficult as it would need to overcome jurisdictions’ differences in law, policy, markets and implementation timing, as well as to take into account the unique nature of jurisdictions’ legislative and regulatory processes.

Leaders recognise that national authorities have ultimate responsibility and authority to protect against all sources of risk to their markets, and that statutory and regulatory requirements of each jurisdiction are core components of each respective market. Legal systems and market conditions differ among jurisdictions and due account should be taken of such differences in determining the cross-border application of laws and regulations.

They also recognise that conflicting or inconsistent cross-border application of rules to market participants, intermediaries, infrastructures and products may inhibit the execution or clearing of certain cross-border transactions or impose additional compliance burdens. They further recognise that regulatory gaps may present risks to financial markets and provide the potential for regulatory arbitrage.

During their series of discussions, they have identified various potential conflicts, inconsistencies, and duplicative requirements within our respective contemplated rules and they will continue to discuss measures to ameliorate the challenges they raise. In this connection, it is therefore important to

• develop concrete and practical solutions with respect to any conflicting application of rules,
• identify inconsistent or duplicative requirements and attempt to reduce the regulatory burdens associated with such requirements, and
• identify gaps and reduce the potential for regulatory arbitrage.

Full statement

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