The Alternative Investment Management Association (AIMA) has produced a paper which focuses on the risk that OTC derivatives transactions could be subject to unnecessarily duplicative – or even conflicting – requirements as a result of the extraterritorial application of rules under EMIR and Dodd-Frank.
Both EMIR and Dodd-Frank apply extraterritorially by virtue of provisions in each that seek to impose certain requirements on entities located, or on transactions executed, overseas. Given the global nature of the derivatives market and the potential overlapping extraterritorial reach of EMIR and Dodd-Frank, there is potential for conflict and overlap between certain ESMA and U.S. Commodity Futures Trading Commission (CFTC) regulations adopted under EMIR and Dodd-Frank, notwithstanding the shared objectives of promoting central clearing, increasing transparency and overall financial stability.
AIMA’s paper provides examples of potential regulatory conflicts or unnecessary overlap between EMIR and the CFTC’s derivatives rules in a number of key areas including clearing obligations, reporting obligations, segregation rules, eligible collateral rules and margin requirements for uncleared swaps. AIMA concludes that, if untreated, some of the conflicting rules may prevent counterparties from complying with either regime, leading to market fragmentation along geographical boundaries.
There are provisions in EMIR intended to allow the relevant regulatory authorities eliminate conflicts or duplication with the requirements of another jurisdiction by treating compliance with the requirements of that jurisdiction as amounting to compliance with the EMIR requirements, a concept referred to as "equivalence". Similar provisions exist under Dodd-Frank, referred to under the CFTC’s proposed interpretative guidance on the cross-border application of the Dodd-Frank swap requirements as "substituted compliance". AIMA highlights the fact that the concepts of "equivalence" and "substituted compliance" could be relied on to mitigate the adverse effects on cross-border transactions of conflicting rules - firms could be allowed to follow the rules of the jurisdiction of one, rather than both counterparties to a transaction.
A spokesman for AIMA has been quoted as saying that it is AMIA’s hope that, by highlighting the key examples of potential problems, their paper will contribute to the current intensive international regulatory dialogue between the CFTC, the US Securities and Exchange Commission and the European Commission, respectively.