IOSCO consultation on cross-border Regulations

On 11/25, 2014  IOSCO issued  a very unusual consultation report on cross-border Regulations (comments may be submitted before 2/23, 2015). The oddity comes from the fact that, contrary to the normal uses, this consultation proposes no questions for the market participants to ask. It is, basically, a  description (and a very interesting one, indeed) of the mores of the Securities Regulators worldwide when it comes to coping with cross-border transactions. This is in itself quite valuable as a market intelligence tool ; but it stops there. So the reaction of the slightly disoriented usual reader of this kind of litterature might well be : ‘ and so what ? ‘.

We think that this ‘open-end’ approach is interesting, insofar as it forces the reader to supply their own sets of questions. On our side we would suggest a few meta-questions, that is, those that arise not from the text itself, but rather from its context. One may well wonder indeed : ‘why is this consultation issued now ?’, ‘what exactly is at stake, both for the Regulators and for the market at large ?’, ‘why has this unusual format been adopted?’, and finally, ‘what is it that we should  comment on exactly? ‘.

Before getting to these points, we will summarize the findings of the Task Force commissioned to do this job, conducted through a survey among the IOSCO members (37 contributed) from October 2013 through April 2014. These conclusions do not intend to draw a full and comprehensive view of all the existing practices of all the Regulators of the world, but they provide a useful categorization of the ‘tools’ used by the Regulators in the major jurisdictions worldwide.

The Survey

According to those findings, the tools  used by Regulators worldwide when dealing with cross-border transactions may be classified in three categories : i) national treatment ii) recognition iii) passporting.

Each of these categories entails its own set of benefits and challenges. Although no hierarchy or preferences are indicated, it seems obvious from the presentation that there is an implicit ‘evolutionary ladder’ from stage one (national treatment) to stage three (passporting). Wether this evolution is seen as positive or negative is left for the reader to judge. From our standpoint, however, there is little doubt that stage three delivers important benefits to the market in general, that is,  both to the Regulated and to the Regulators, without impairing the protection of the investors.

  1. National treatment refers to a regime  in which, regardless of the details of the foreign regulatory regime or how it may compare to the domestic one, entities domiciled in or operating from foreign jurisdictions are generally treated in the same manner as domestic ones in terms of domestic entry and ongoing regulatory requirements.
  2. Recognition refers to a regime under which a host regulator assesses and “recognizes” a foreign regulatory regime, or parts thereof. This may be unilateral or mutual, depending on whether two-way recognition is required between the jurisdictions.
  3. Passporting refers to a regime  based on a common set of rules which are applicable in the jurisdictions covered by the arrangement. Passporting of financial products and financial services providers allows the holder in one jurisdiction to offer products and services in any of the other jurisdictions. No further authorizations are needed.

The best example of a fully devloped passporting regime is to be found in the European Union.


  1. The comparative benefits and challenges of these three approaches might be tabulated as follows :


  Regulator ‘s perspective Regulated’s  perspective
  Benefits Challenges Benefits Challenges
National treatment No need to invest in assessing the foreign regulations Runs against market fluidity, and may impair the capacity of home firms to develop abroad (reciprocity) Predictability, transparency, and efficiency

in the regulation for any particular market

Barrier to entry in the host market


Multiplicity of rules when addressing multi jurisdictions needs (increased legal risk)



Recognition No identified benefits Need to invest time and resources to properly assess the foreign regulations.


Difficulty to really define what is ‘outcomes based’ eligibility


Difficulties to inspect foreign-based institutions

Possibility to operate under the more familiar ‘home’ regulation Depending on the level of recognition, legal certainty is a risk


Need to invest tume and resources in understanding multiple legal systems

Passporting One single Book of Rules


No need to invest in understanding foreign regulations

Need of a specific legal framework and multilateral agreement


Need to agree on a common set of rules and a common authority

One single Book of Rules


Easier compliance and less legal cost


Less Legal Risk

No identified challenges



The Consultation :

We are intrigued by two questions : what is IOSCO trying to achieve with this peculiar consultation, and what is really at stake for the industry. Consequently, what kind of comments should the market players issue ?

First, we think that the timing of this consultation is significant. As a general context, there is a sense of uneasiness in the market about the gaps, inconsistencies and overlaps in the recent flood of new regulations, which creates unnecessary but very real  tensions between the Regulators and the Regulated.

More specifically, the implementation of EMIR is colliding with the implementation of DFA in a way which had probably not been foreseen (much less desired !) be it by the CFTC or ESMA. Many market participants complain about the extra-territoriality of rules and licensing, and feel unsecure and struggling to comply ; a good example is the perceived difficulty to define with legal certainty if a given client, counterparty or intermediary of a European market player is or is not a US person under DFA, which in practice leaves many participants in doubt wether to report both to the CFTC and to ESMA for the same deal. Of course, these problems, are by no means circunscribed to the EU and the US relationship, as they are multilateral in nature. But it is there that they are now the most conspicuous.

Second, this problem cannot be solved within IOSCO, no matter what amount of goodwill is brought to the negotiation table. The reason is that each Commission is constrained by the laws of its jurisdiction, and if those laws collide with those of the other jurisdiction, there is no way out, at least  from the pure regulatory perspective. For example, if a deal or a market participant (ie, a swap dealer) is deemed ‘important’ to the US trade it will have to report to CFTC by the US law, even if it is a ‘foreign’ deal or participant. The CFTC might grant waivers ( under strict conditions), but its obligation to supervise these deals or market participants remains, and the CFTC cannot  legally abstract itself from it. On the other side, if the swap dealer  is a European-based Institution, ESMA is mandated to supervise it. A conflict of supervision may arise which is not solvable at that level. A specific legal framework is needed, either bilateral or multilateral. This is very well explained in the chapter dedicated to the passporting regime.

So, what this might be telling us is that IOSCO needs help from  the lawmakers in order to create a new worldwide legal framework for regulatory supervision, and alleviate the tensions on the market –and also on their own resources, very much strained in the ‘recognition’ exercices.

This consultation may then be a means to attract attention from the lawmakers on this gigantic task and also, interestingly,  a way to kindly request the help of the market participants to ‘ring the bell’ to fight the fire. Of course, in this context posing too direct questions might be politically akward,  so  maybe it was better for IOSCO to let the industry find out what where the right questions…and the good answers !

This leads to the last question : what should the industry do ? To comment or not to comment, that is the question.

From the Regulated perspective, the present situation is altogether not satisfactory, and might worsen. In our view, the only long-term solution to the overlap problem is a broad application of passporting (the alternative being a permanent struggle among Regulators and between the Regulators and the Regulated). But of course, the lawmakers need some kind of incentive, in order to start. It ensues that responding to the IOSCO call with a vibrant although reasoned and documented  ‘Passport is good !’ manifesto is the right thing to do for all the market participants and the industry as a whole. Et voila !



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