August 5, 2015

The World Federation of Exchanges, the global trade association for exchanges, has written to the European Commission to express its concern that delays and a lack of transparency in EMIR equivalence determinations for third country central counter parties present a challenge to economic growth and development in many Emerging Market economies.

''For emerging markets to develop their capital markets, their exchanges and CCPs must be able to maintain, develop and grow their links with financial institutions all over the world,'' WFE wrote in a letter to the EU. ''However, the current recognition process means that European participants are uncertain about the regulatory status of many Third Country-CCPs (TC-CCPs) and their consequent ability to engage in these markets, having a deleterious impact on 'business-as-usual' for these CCPs. The delayed equivalence decisions are therefore compounding the macro-economic challenges that these markets already face.'' 

WFE has 64 member exchanges, representing 23 markets, of whom 29 are from emerging or frontier markets. The industry association is currently chaired by Juan Pablo Cordoba, chief executive of the Colombian Stock Exchange. The delays could lead to regulatory arbitrage by foreign businesses operating in EM markets and a flight of foreign capital to those jurisdictions which do not face the same barriers, the letter said. "The imposition of regulatory barriers to foreign businesses seeking to transact in third-country markets (and vice versa) can lead to a rapid depletion of liquidity as capital moves to jurisdictions that are not subject to the same barriers,'' the letter says. ''This effective regulatory arbitrage may result in a reduction of inward foreign exchange flows, which can be very costly to all markets, but particularly jurisdictions that do not have deep and resilient domestic capital markets that can backstop sudden shortfalls."

The WFE also told the EU that the delays may further fragment global liquidity in OTC derivatives markets, which will soon be subject to EMIR clearing obligations. ''Delayed equivalence will increasingly have the effect of cutting off TC-CCPs from European market participants,'' Nandini Sukumar, CEO of WFE, and Cordoba, Chairman of WFE, told the EU. "In addition, given that EU clearing obligations are expected in the first half of 2016 and EU entities are now making decisions about those clearing arrangements and obligations, it is problematic that many TC-CCPs from well-regulated jurisdictions are not yet eligible for use by EU counter parties.''

''This threatens to lead to a re-allocation of derivatives trading activity and liquidity away from markets that have not received equivalence determinations. The likely impact is that, without timely decision-making on equivalence, existing pools of liquidity in OTC products that are traded and cleared on a cross-border basis will fragment along the lines of equivalence jurisdictions. Such an outcome will lead to competitive distortions caused by a lack of effective and timely decision making, and would exacerbate the liquidity and foreign exchange risk that emerging market CCPs are facing.''

The WFE urges the Commission and other European regulators to expedite the equivalence determinations in order to avoid these negative effects. BACKGROUND: Currently, ten CCPs from four jurisdictions (Australia, Hong Kong, Japan, and Singapore) have been recognized as TC-CCPs. However, an additional 31 CCPs from 14 jurisdictions – including emerging markets – are currently awaiting such recognition. Many of these CCPs are based in jurisdictions that have substantially similar or even stronger prudential requirements than the jurisdictions that have been granted equivalence to date.

The determinations are required before ESMA can grant recognition to any individual TC-CCP applicant and, within the EU, the granting of qualified central counterparty ("QCCP") status for purposes of the specific capital allocation requirements applicable to EU financial institutions under Basel III depends on their recognition by ESMA as a TC-CCP.


The World Federation of Exchanges ("WFE") is a global trade association that represents 64 publicly regulated stock, futures, and options exchanges, as well as the CCPs operated by our member exchanges. WFE promotes the development of fair, efficient, and transparent markets, and we work with policy makers, regulators, and standard-setters around the world to support the development of effective rules and standards for exchanges and market participants.

Copy WFE letter to EU Commissioner Lord Hill
Report Date: Wed, 09/02/2015

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For more information, please contact:

Charlotte Wilson
Streets Consulting
Email: [email protected]
Phone: +44 20 7959 2235
Twitter: @TheWFE