The International Organization of Securities Commissions (IOSCO) has published a series of eleven good practices on processes for deference to assist regulatory authorities in mitigating the risk of unintended, regulatory-driven market fragmentation and to strengthen international cooperation.
Wholesale securities and derivatives markets are global in nature and many market participants operate on a cross-border basis. As a result, analysts say, numerous authorities have implemented deference processes that allow them to rely on one another to regulate and supervise these market participants and help reduce potentially duplicative or conflicting regulations.
Over time, the use of deference between regulators has significantly increased, in parallel with enhanced cross border capital flows. IOSCO’s 2019 Report on Market Fragmentation and Cross-Border Regulation, which was submitted to the G-20, suggested that IOSCO should identify good practices to enhance the processes for deference determinations further.
“Deference is a powerful tool for addressing the risk of regulatory-driven fragmentation in increasingly cross-border markets,” said Jun Mizuguchi, Senior Deputy Commissioner for International Affairs at the Japan Financial Services Agency and co-chair of IOSCO´s follow-up work on market fragmentation. “This Report will assist both regulatory authorities who are looking to add deference to their regulatory options and those seeking to improve their current processes,” Mizuguchi added.
The aim of the eleven Good Practices identified in today´s report is to help members in establishing and operating efficient deference processes. They are underpinned by the philosophy that deference processes should be outcomes-based, risk-sensitive, transparent, sufficiently flexible and supported by strong cooperation. They cover all phases of the deference process and focus on several key issues, such as:
- Arrangements for ensuring transparency of deference processes, including the scope, steps and criteria;
- the criteria for making an outcomes-based assessment of the assessed authority and/or firm, including the nature of the supervisory and enforcement practices in the assessed jurisdiction;
- important factors such as the nature and degree of risks that entities from another jurisdiction may pose in their markets;
- the level of engagement, cooperation and communication between the assessing authority and the assessed authority and/or firm throughout the process and once deference has been granted; and
- revocation of a deference determination.
IOSCO said it drew on the experience of the European Commission and members of the Committee on Payments and Market Infrastructures (CPMI)-IOSCO to develop these Good Practices. “In the past, the G-20 has stressed the importance of authorities deferring to one another when justified and in the right circumstances,” said Louis Morisset, President and Chief Executive Officer of the Autorité des marchés financiers Quebec and co-chair of this work.
“Great efforts have been made since then, with numerous jurisdictions implementing tools that IOSCO published in 2015 to strengthen cross-border cooperation. Nevertheless, further improvements are needed, and we believe this Report is a step in that direction,” Morisset added.