By Gaurav Chandra, Product Manager, AxiomSL EMEA
Once the 2007-8 financial crisis exposed the fragility of global financial markets, G20 leaders grasped the importance of implementing regulatory regimes that enhance the resilience and transparency of derivatives markets. A host of regulations followed, including the EU’s European Market Infrastructure Regulation (EMIR), passed in 2012, and the US’ 2010 Dodd-Frank Act.
While this realignment was taking place, other financial centres realised the necessity of following suit in order to maintain access to key markets. Switzerland’s Financial Markets Infrastructure Act (FMIA), also known as FinfraG, is a key example of this approach. As a global financial centre that sits outside the European Union (EU), the country’s regulator – FINMA – had to develop its own regulation in order to protect Swiss market integrity. Cue FinfraG, which was adopted by the Swiss Federal Assembly in June 2015 and came into effect at the beginning of 2016. This is largely in line with G-20 derivative reporting regimes, addressing key changes in the financial market infrastructures, such as central clearing counterparties (CCPs) and trading platforms. Like EMIR and Dodd Frank, FinfraG ultimately aims to both increase transparency in the Swiss OTC derivatives market and reduce systemic and operational risks.
The scope of FinfraG is wide: all entities incorporated in Switzerland, their foreign branches and Swiss branches of foreign firms are required to report under FinfraG regime. FinfraG imposes a number of obligations on counterparties (CPs) including clearing as well as reporting and risk mitigation. As part of the reporting regime, all OTC and ETD transactions must be reported to a Trade Repository (TR) approved by FINMA by T+1.
On this point, EMIR and FinfraG obligations demonstrate certain similarities. For example, both require CPs to report all derivatives to a TR, whereby all ETD and OTC transactions have to be reported through their lifecycle. This commonality allows market participants to leverage the majority of stored EMIR data for FinfraG reporting purposes.
However, even though FinfraG was built within a post-crisis regulatory consensus, there are some key differences between FinfraG and its European counterpart. For example, while EMIR came into effect with one go-live date on 12 February 2014, its Swiss equivalent is following a ‘phased in’ approach, with multiple go-live dates which will be six months, nine months or twelve months after the approval of the TRs, starting from October 2017. Moreover, the reporting concept under FinfraG is single sided, meaning that only one of the CPs is obliged to report, whereas EMIR’s corresponding provision stipulates that both CPs submit a report of their trade. Another difference is the regional scope: whereas FinfraG applies to firms with registered offices in Switzerland and their foreign branches, as well as Swiss branches of foreign entities, the focus of the EMIR regulation resides within the EU. Under both regimes, the CPs need to classify themselves according to the categories presented by their respective regulator, in order to determine which parts of the regulations apply to them. For example, there are three categories under EMIR: one for Financial Counterparties known as FCs, one for Non-Financial Counterparties (NFCs) which have outstanding derivative transactions with a gross notional value above €1 billion for credit and equity derivatives, or €3 billion for rates, FX and commodity transactions, known as NFC+, and one for NFCs whose transactions are below that value, known as NFC-. In contrast, FinfraG regulation further subdivides FCs into two other categories: FC+ and FC-. In fact, the threshold limits that dictate whether a CP is classified as ‘+’ or ‘-’ are different in Switzerland when compared with the rest of the EU.
As such, while on the face of it the regulations look similar, there are some critical differences when you focus on the details and financial institutions run an operational risk if they fail to address this difference. Overall, Switzerland’s regulatory response to the financial crisis demonstrates the same intent and employs similar processes to improve transparency and resilience in financial markets as the EU and other jurisdictions. The devil is in the detail and the seemingly similar regimes start appearing very different once the regulations are scrutinized thoroughly.
As featured in TabbFORUM.