EU Consults on Potential Equivalence for Six Countries For Non-Centrally Cleared OTC Derivatives Risk Mitigation

The European Commission has published for consultation draft equivalence decisions for six countries relating to the risk mitigation requirements for non-centrally cleared OTC derivatives under the European Market Infrastructure Regulation. EMIR requires counterparties to non-centrally cleared derivatives to comply with requirements on timely confirmation, portfolio compression, procedures for reconciliation of disputes and the exchange of collateral, collectively known as the risk mitigation techniques. The European Commission is empowered to adopt an equivalence decision declaring that the requirements of a third country are equivalent to the EMIR requirements on risk mitigation. To date, only the U.S. and Japan benefit from such decisions, both limited in scope. Each of the draft decisions for each country are detailed further below.

Australia

The draft decision for Australia is for:

(a) the portfolio compression and transaction valuation requirements applied to non-centrally cleared OTC derivative transactions regulated by the Australian Prudential Regulation Authority where at least one of the counterparties to the transaction is an APRA covered entity; and

(b) collateral exchange requirements applied to non-centrally cleared OTC derivative transactions regulated by APRA, where at least one counterparty is an APRA covered entity and variation margin is provided on the same day that it is calculated, unless that is not possible, in which case margin is provided within two working days of its calculation and the margin period of risk used to calculate the initial margin is adjusted accordingly.

Brazil

The draft decision for Brazil is for:

(a) timely confirmation, daily valuation and portfolio reconciliation for non-centrally cleared OTC derivative transactions regulated by the Banco Central do Brasil and the Comissão de Valores Mobiliários where at least one of the counterparties is an in-scope counterparty for the purposes of the margin rules for Brazil; and

(b) exchange of collateral requirements as applied by the BCB and CVM, except for physically settled commodity derivatives (not including gold derivatives) where at least one of the counterparties is an in-scope counterparty for the purposes of the margin rules for Brazil.

Canada

The draft decision for Canada is for:

(a) the dispute resolution obligations set out in Guideline B-7 that are applied to non-centrally cleared derivative transactions regulated by the Office of the Superintendent of Financial Institutions where at least one of the counterparties to the transaction is established in Canada and is a Covered Federally Regulated Financial Institution as defined under Guideline E-22; and

(b) exchange of collateral requirements applied to non-centrally cleared derivative transactions that are regulated by OSFI, with the exception of physically settled commodity derivatives, provided that at least one of the counterparties is established in Canada and is subject to the margin requirements of Canada, the transactions are marked-to-market and variation margin is exchanged on the same day in which it is calculated, unless that is not possible, in which case margin is provided within two working days of its calculation and the margin period of risk used to calculate the initial margin is adjusted accordingly.

Hong Kong

The draft decision for Hong Kong is for the timely confirmation, portfolio compression and reconciliation, valuation and dispute resolution requirements applicable to non-centrally cleared derivative transactions regulated by the Hong Kong Monetary Authority where at least one of the counterparties to the transaction is an authorized institution and subject to the risk mitigation requirements set out in HKMA's Supervisory Policy Module and for the exchange of collateral requirements applicable to non-centrally cleared derivative transactions regulated by HKMA.

Singapore

The draft decision for Singapore is for:

(a) trade confirmation and dispute resolution requirements applied to transactions regulated as OTC derivatives by the Monetary Authority of Singapore and that are non-centrally cleared, where at least one of the counterparties is established in Singapore and is a "MAS Covered Entity"; and

(b) exchange of collateral requirements applied to transactions regulated as OTC derivatives by the Monetary Authority of Singapore and that are non-centrally cleared, except for physically-settled commodity derivatives for commercial purposes, provided that at least one of the counterparties is established in Singapore and is a "MAS Covered Entity" and the transactions are marked to market and variation margin is exchanged on the same day in which it is calculated unless that is not possible, in which case margin is provided within two working days of its calculation and the margin period of risk used to calculate the initial margin is adjusted accordingly.

U.S.

The draft decision for the U.S. is for the collateral exchange requirements applied to security-based swaps that are non-centrally cleared where at least one of the counterparties to those transactions is established in the U.S. and is considered a Covered Swap Entity by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration or the Federal Housing Finance Agency, and that the counterparty is subject to the appropriate Swap Margin Rule.

The existing equivalence decision applies only to swaps regulated by the Commodity Futures Trading Commission where at least one of the counterparties to the swap is established in the U.S. and is registered with the CFTC as a swap dealer or a major swap participant, and for collateral exchange, where the U.S. counterparty is subject to CFTC margin requirements. As a result, this would represent an expansion of the current equivalency regime for the U.S.

View the draft equivalence decision for Australia.

View the draft equivalence decision for Brazil.

View the draft equivalence decision for Canada.

View the draft equivalence decision for Hong Kong.

View the draft equivalence decision for Singapore.

View the draft equivalence decision for the U.S.

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