EU Regulatory Changes and Its Impact on Korea

Transcription

1 DEUTSCHE BANK GROUP EU Regulatory Changes and Its Impact on Korea March 2014

2 Contents 1. Executive Summary 2. Status of Cross-Border Trades 3. Why is equivalence so important? 4. Status of CCPs in Korea 5. Recommendations for CCPs in Korea 1

3 Contents 1. Executive Summary 2. Status of Cross-Border Trades 3. Why is equivalence so important? 4. Status of CCPs in Korea 5. Recommendations for CCPs in Korea 2

4 1. Executive Summary 3

5 Global Snapshot of Derivatives Reform Most rules finalised Most rules proposed Very early stage We have focused our analysis on 8 key jurisdictions: U.S., EU, Canada, Brazil, Japan, Hong Kong, Singapore and Australia 4

6 Summary Timing Overview Proposals on most rule making areas Over 90% of rules finalised by CFTC EMIR entered into force Issuance of several technical standards Consultation papers addressing most rulemaking areas issued Legislation on reporting adopted Implementation of central clearing rules Financial instruments and Exchange Act amended Consultation and conclusion papers on broad derivatives reform introduced Consultation and legislation on central clearing and post-trade reporting obligations introduced Legislation adopted Implementation of most requirements July 1: New ISDA protocol deadline Implementation of several technical standards (e.g. risk mitigation techniques) Detailed proposals on reporting adopted in Ontario, Québec and Manitoba CSA proposals on model clearing rules Regulation on pension eligibility for OTC trading expected Post trade reporting implemented Legislation proposed which includes clearing and reporting Further consultation on regulations expected 4Q 2013 Further consultation on reporting and clearing Licensing requirements for CCPs and TRs effective Finalised post-trade reporting requirements Review of whether to introduce mandatory clearing for certain products led to recommendation of mandatory clearing for interest rate derivatives denominated in GBP, EUR, JPY & USD Final rules on margin for uncleared swaps Consultation on EU-margin proposal in Q1 2014, final adoption by Q Implementation of reporting and clearing requirements Start of reporting requirements in Ontario, Québec and Manitoba Provincial clearing rules to be adopted Continued compliance with pre-existing regulation New legislation expected to take effect in 2Q 2014 Clearing requirements to become effective in H Commencement of trade reporting Further OTC derivatives market assessment early 2014 to determine whether additional requirements for clearing should be recommended Phasing in of reporting requirements Source: FSB: Sixth progress report on implementation of OTC derivatives market reforms (September 2013) 5

7 Summary Rules Overview Indicates general scope of regulatory reform Central Clearing Exchange Trading Post-Trade Reporting (to the market) Post-Trade Reporting (to the regulator) Margin (for centrally cleared contracts) (final details TBD) (for centrally cleared contracts) (final details TBD) (early stage) Global regulators monitored progress by the BCBS-IOSCO Working Group on Margining Requirements; (guidance on margin rules published by BCBS-IOSCO 2 September13) Voluntary for most products Source: FSB: Sixth progress report on implementation of OTC derivatives market reforms (September 2013) 6

8 Infrastructure Status Update Clearing Houses Clearing House Status Interest Rate Credit FX Commodities Equities CME Group Operational Expected ICE Credit Clear Operational LCH Clearnet Operational Options Clearing Corp. TBC Expected CME Clearing Europe Operational Expected Expected Eurex Clearing Operational Expected European Commodity Clearing Operational ICE Clear Operational LCH Clearnet Operational CDCC Operational Expected Expected JSCC Operational HKEX Operational Expected 4Q 2013 Expected 4Q 2013 SGX-DC Operational BM&F Bovespa Operational ASX Operational Source: FSB: Sixth progress report on implementation of OTC derivatives market reforms (September 2013) 7

9 Infrastructure Status Update Trade Repositories Reporting Repositories Status Interest Rate Credit FX Commodities Equities Listed derivatives CME Group Operational Not DTCC-DDR Operational applicable ICE Trade Vault Operational for US DTCC-GTR Europe tbc Regis-TR tbc ICE Trade Vault tbc tbc CME Group tbc tbc KDPW tbc tbc tbc tbc UnaVista tbc Capital Track tbc tbc tbc tbc tbc tbc tbc Source: Unconfirmed public sources/internet 8

10 Infrastructure Status Update Trade Repositories Mexico, Canada Reporting Repositories Status Interest Rate Credit FX Commodities Equities DTCC Data Repository Japan Operational HKMA Expected 4Q 2013 DTCC Singapore Expected 1Q 2014 Expected Expected Expected Expected Expected BM&F Bovespa Operational CETIP Operational DTCC Australia Expected 1Q 2014 Source: FSB: Sixth progress report on implementation of OTC derivatives market reforms (September 2013) Note: Registration of European trade repositories due to open in February

11 Contents 1. Executive Summary 2. Status of Cross-Border Trades 3. Why is equivalence so important? 4. Status of CCPs in Korea 5. Recommendations for CCPs in Korea 10

12 2. Status of Cross-Border Trades 10

13 3/20/2014 OTC derivatives Jurisdictions are making progress on implementation of derivatives reforms Changes needed to implement the G20 OTC derivatives commitments are underway across all FSB jurisdictions As rules take effect, uncertainty about the treatment of cross-border activity will become a more pressing concern Regulators should continue to cooperate in the cross-border application of regulations, to enable them to defer to each other where these achieve similar outcomes. Detailed work, and a timeline for action, is thus needed to address the challenges in translating the encouraging recent cross-border regulatory understandings into practice ~ Financial Stability Board, September 2013 Source: Financial Stability Board OTC Derivatives Market Reforms Fifth Progress Report on Implementation, April

14 OTC derivatives Key risks of divergence Issue Scope of counterparties covered Platform bifurcation Margin requirements for non cleared derivatives CCP memberships Conflicting clearing obligations Overlapping rules Risks Scope of counterparties covered in each jurisdiction differs and some rules have extraterritorial effect e.g. some aspects of EU legislation apply to non-eu counterparties, though not clear if non-financial counterparties are in scope Derivatives platforms based anywhere may be bound by US rules if they trade with a US counterparty. Could result in fragmented liquidity if platforms split their offerings into US and non-us trading pools For cross-border trades, margin models need to be agreed by counterparties and must be approved in each jurisdiction. Under Article 25 of EMIR, for EU banks to continue to be members non-eu CCPs they must apply for recognition by ESMA and receive an equivalence determination from the EC within a fixed time period. For cross border trades, CCPs must be recognised by both jurisdictions, to satisfy clearing obligations. If regulators define conflicting criteria, it will be difficult for CCPs/cross border trades to satisfy both rules The proposed definition of US persons will result in many entities captured by transaction level rules (margin/clearing). E.g. an EU branch of a US bank will be subject to these rules when dealing with a US counterparty, in addition to EU rules Intragroup transactions Reporting requirements Approval from clearing and margining for cross border intragroup transaction exemptions depends on equivalence determinations and approval from both regulators Trade repositories and swap execution venues need to be able to meet criteria for recognition in both jurisdictions for cross-border trades. Reporting requirements are not the same between the EU/US 13

15 OTC derivatives Approaches to equivalence assessments At a global level regulators are working together to identify ways to manage rules on a crossborder basis: United States European Union Other Jurisdictions Substituted compliance The CFTC evaluates whether foreign regulatory requirements are comparable and comprehensive Granted on a firm-by-firm and requirement-by-requirement basis (rather than an analysis of a foreign jurisdiction s regulatory regime) Temporary relief for certain transactions and entities to allow for timing differences between US and other rules Equivalence assessment The European Commission can adopt rules determining that the legal, supervisory and enforcement arrangements of a third country are equivalent to the EMIR rules in relation to clearing, reporting and requirements for noncleared derivatives Most APAC jurisdictions have included some form of recognition provision in their framework for clearing and reporting, although as yet there is little detail on the process and how they will determine whether to rely on home regulators 14

16 An international approach Understandings to resolving cross border issues? On 30 August 2013, representatives of Australia, Brazil, the EU, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the US agreed to: Consult and communicate when equivalence or substituted compliance assessments are being undertaken Take a flexible, outcomes-based approach to assessments Take a stricter-rule applies approach to gaps in trading or clearing requirements Consult ahead of determining mandatory clearing determinations Remove barriers to reporting to trade repositories by market participants and to access to trade repository data by authorities Provide for appropriate transitional measures and a reasonable but limited transition period for foreign entities However, the process for implementing these understandings remains to be developed The Principals agree to deal pragmatically through the ODRG, other multilateral groups, and/or on bilateral bases, as needed, with a view to ensuring that the G20 goals are met while also aiming to minimise disruption and legal uncertainty. ~ OTC Derivatives Regulators Group (ODRG), August

17 Contents 1. Executive Summary 2. Status of Cross-Border Trades 3. Why is equivalence so important? 4. Status of CCPs in Korea 5. Recommendations for CCPs in Korea 16

18 Why is equivalence so important? What is equivalence? Equivalence is the mechanism by which an authority in one jurisdiction considers the extent to which it can rely on another jurisdiction s regulations How can equivalence be assessed? Equivalence judgments one country reviews legislation and rules in another to assess the extent to which they are the same and may then adjust local requirements accordingly Substituted compliance a regulated firm from one country is allowed to comply with foreign regulations if those rules are deemed to be equivalent, with decisions made on a case-by-case basis Mutual recognition bilateral or multilateral agreement to recognise regimes and allow direct access to markets With the trend towards increased globalisation and the large number of global regulatory reforms, getting equivalence right is becoming increasingly important 17

19 Why is equivalence so important? Equivalence is essential to cross border trade and capital flows We are committed to take action. to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage ~ G20 Communiqué, Pittsburgh 2009 If implemented appropriately, equivalence can: Support consistency and convergence of practices, and cross border passporting Reduce duplicating, conflicting or complex requirements arising from extraterritoriality Support cross-border activities of financial institutions, corporates and consumers, which will improve: access to funding and capital risk and liquidity management access to services and products Ensure fair, transparent and efficient markets and investor protection 18

20 Why is equivalence so important? Benefits from equivalence require common approaches on cross-border basis Differences in approaches are emerging in some areas that could weaken the effectiveness of reforms in these markets, create potential opportunities for regulatory arbitrage, or subject market participants and infrastructures to conflicting regulatory requirements. ~ Financial Stability Board (FSB), April 2011 However, whether these benefits can be realised will depend on how equivalence is implemented. Challenges include: Judgments being made against different standards (e.g. local rules versus global standards) Timetables not taking into account implementation status in other jurisdictions Insufficient adaptation to local context (e.g. legal frameworks, market development) We will not seek to apply our rules (unreasonably) in the other jurisdiction, but will rely on the application and enforcement of the rules by the other jurisdiction. ~ US Commodity Futures Trading Commission (CFTC) and EU joint announcement on cross-border derivatives, July

21 Risks of fragmentation Benefits from equivalence require common cross border approaches 1. Disruption of cross border activity lack of a proportionate approach to equivalence may disrupt the risk management activities of multinational companies, reduce liquidity in certain jurisdictions and create legal uncertainty 2. Competitive distortions lower standards in one jurisdiction create competitive advantages, unnecessarily restrictive standards damage competitiveness 3. Trapped capital rules which ring fence capital within borders can undermine global flows of capital and potentially increase financial stability risks 4. Regulatory arbitrage fragmented rules create damaging opportunities for arbitrage 5. Undermining cross border resolution if national resolution regimes are not recognised on a cross border basis the resolution of cross border banks will be difficult, creating financial stability risks 20

22 Risks of fragmentation The risks of fragmentation have increased Increased quantum of regulation Number of document changes, announcements and enforcements by regulatory agencies ~17,800 Fragmentation of regulation Examples US Europe Asia Structural reform (Vickers, Volcker, Liikanen) Financial Transaction Tax ~14,200 Recovery and resolution regime ~8,700 ~10,100 ~12,200 Bank levies Compensation reform Foreign banks capital requirements Some softening of some proposals Significant additional regulation Aim for open but wellregulated markets Source: Thomson Reuters Accelus 21

23 Risks of fragmentation International coordination in a fragmented environment is challenging United States EU APAC US has increased pace and tightened regulations: Prudential rules / Basel 3 Volcker / Swaps push out No likelihood of functional reforms Additional recent proposals affecting European banks: Bank structure reform Financial transaction tax CRD 4 incl. comp reform Regulators committed to implement global reforms, but in a way that supports market development and often only once there is clarity on EU and US regime The Fed laid out plans for future 2012 US bank reforms that go beyond an international agreement ~FoxBusiness, 2 July 2013 European banks warned to expect tougher scrutiny ~Financial Times, 16 May 2013 Japan delays cross-border rules amid US and 2013 European uncertainty ~AsiaRisk, 22 May 2013 However, through the G20/FSB and international standards setting bodies like IOSCO and the BCBS, we have a framework through which these challenges can be resolved 22

24 Recommendations Guiding principles for assessment approaches The G20 standard must be the standard G20 endorsement of equivalence principles must be unequivocal by the entire membership Agreements intended to support consistency should not be undermined by national implementation Political reality and policy-making processes may still result in local variations in practices, but should expect shared objectives and alignment with global agreements National implementation should take into account the global dimension Primary legislation and regulations should reflect or reference global standards Outcomes-focused approaches will allow for differences between jurisdictions Prescriptive approaches will inevitably result in fragmentation - undermining coordination and consistency needed for stability and growth and to support cross-border activity Extraterritorial impacts should be avoided Equivalence should not equate to the exporting of detailed rules to another jurisdiction or ultra vires regulation Impact studies should consider implications for other jurisdictions 23

25 Contents 1. Executive Summary 2. Status of Cross-Border Trades 3. Why is equivalence so important? 4. Status of CCPs in Korea 5. Recommendations for CCPs in Korea 24

26 STATUS OF CCPs in KOREA Legal Framework Legal Framework Financial Investment Products under the FSCMA in Korea Exchange traded derivatives KRX - Existing CCP for exchange traded derivatives Securities Derivatives OTC derivatives KRX - New CCP for OTC derivatives (KRW IRS) - Mandatory clearing starts June

27 STATUS OF CCPs in KOREA Timeline Current Status 1. The Amendment to the FSCMA mandating the CCP clearing for OTC derivatives has become effective as of 6 July The Amendment to the Enforcement Decree of the FSCMA has become effective as of 9 July FSC issued an amendment to the Detailed Rules of FSCMA on 9 July 2013 in which the effective date for such mandatory clearing is set for 30 June FSC endorsed a CCP license to the KRX in September KRX has applied for the EMIR recognition before 15 Sept 2013 deadline. 6. Mandatory CCP clearing for the KRW IRS transactions has been set for 30 June 2014 by the FSC. 7. ESMA has issued a final report on Technical advice on third country regulatory equivalence under EMIR South Korea on 1 Oct

28 Contents 1. Executive Summary 2. Status of Cross-Border Trades 3. Why is equivalence so important? 4. Status of CCPs in Korea 5. Recommendations for CCPs in Korea 27

29 Recommendations for CCPs in Korea Positive features of Korea Exchange as a CCP Clearing rules indicate a clear relationship between the CCP, its members and clients of the member. Clear client protection. Clear segregation and portability requirements. FSC, FSS and KRX s willingness to cooperate with foreign regulators. Challenges - Compliance with global standards Inevitable that national laws will not match perfectly (i) legal framework laws & regulations, clearing rules (ii) regulatory bodies FSC, FSS and BOK Extraterritoriality issues FSCMA, Real Name Act, etc. Principles for Financial Market Infrastructure (PFMI) The FSB has identified six priority areas where consistent and comprehensive implementation of reforms is critical for global financial stability: Basel Framework, OTC Derivatives Market Reform, Compensation Practices, G-SIFIs, Resolution Frameworks and Shadow Banking Effective recovery and resolution processes 28

30 Resolution Frameworks FSB Key Attributes for Resolution Regimes in early stage of implementation Resolution tools Recovery & resolution plan Approach to bank structure Bail-in of creditors Resolution financing FSB Key Attributes Powers to sell, separate assets, create bridge bank Group level plans for global systemically important banks (G- SIBs) Powers to make structural changes to ensure resolvability Power to writedown/ convert creditor claims Either ex-ante resolution funds or ex-post funding mechanism USA Dodd- Frank Act FDIC can take over operating entities of banks in a trust Group level for largest US banks US plans for largest foreign banks Same as FSB for US banks Largest foreign banks to create holding company Transfer powers have similar effect Due to propose layer of lossabsorbing debt Temporary loan to FDIC recouped through ex-post levies EU Recovery & Resolution Directive 1 Powers to sell, separate assets, create bridge bank and apply bail-in Individual institution and group level plans Same as FSB under proposed legislation Possible requirement for separation Statutory regime to bail-in broad scope of bank liabilities Resolution funds ex-ante funded to 1% of covered deposits APAC jurisdictions 2 Resolution regime for banks in Australia, Indonesia, Japan, Korea, Singapore Australia & Japan require RRPs for systemic local banks China considering RRPs Indonesia, Korea and Singapore have powers to require changes Transfer powers have similar effect Japan considering contractual bail-in No dedicated funds Japan & Australia propose to use deposit insurance funds 1 RRD not yet finalised, based on European Commission proposal, June Source: Asian bank resolution regimes, Clifford Chance, May

31 Resolution Frameworks What are the consequences of a lack of international coordination? Multiple RRPs may lead to multiple resolution strategies and lack of clarity in a resolution event Multiple recovery and resolution plans Single Group Recovery and Resolution Plan Works with the grain of consolidated supervision and group-wide bank management Most appropriate for centrally structured banks using Single Point of Entry (SPE) strategy Multiple Local Recovery and Resolution Plans Reassures host authority that operations of foreign banks can be safely resolved More suitable for banks with many subsidiaries to take Multiple Point of Entry (MPE) approach Multiple requirements for bail-in may distort bank funding markets and individual bank structures Multiple levels of resources for bail-in Group-wide approach to loss absorbency Minimum bail-in requirements should be set at the most appropriate level for resolution plan For SPE, this will be at group level while solo level requirements are appropriate for MPE Fragmented approach to local requirements Duplication of bail-in minima at group and solo level will require significant debt issuance Financial stability implications of wholesale funding with no clear business purpose Without confidence in coordinated action, countries may require national subsidiarisation Incentives for national ring-fencing Cooperation and coordination Firm-specific cooperation agreements identify barriers to coordination ahead of a crisis National regime recognises foreign action and minimises impact on overseas financial stability Effective or actual national ring-fencing Plan B assumption of no cooperation becomes default option in a crisis when trust is low Incentivises national requirements to hold capital onshore or subsidiarise, trapping capital flows 30

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