The great entity classification conundrum in G20 derivatives regulation

Derivatives market participants operate in a highly regulated and complex world. Around the globe, regulators are framing rules in areas that were once entirely unregulated. The roll-out of new regulations is progressing at differing paces in different jurisdictions and often in a piecemeal fashion. Market participants must keep track of legislative developments in their markets of interest and ensure continual compliance. Again and again, jurisdiction by jurisdiction, participants in the derivatives market find themselves grappling with the question, does this regulation apply to me? This paper looks at how G20 derivatives regulators in various jurisdictions classify market participants and at the breadth and potential extraterritorial reach of that classification. Examined in the following text are important questions for market participants to consider when assessing whether they fall within a regulator’s classification. The ultimate aim is to assess if they are brought within scope of the regulations and required to comply. Consideration is given to the differing approaches that some G20 regulators use to classify market participants in their home jurisdiction and their treatments of foreign branches of local entities and of local branches of foreign entities. Attention is also drawn to the indirect effect of some of these regulations. Also included is a look at the market initiatives that industry bodies have been developing to assist market participants in determining their own classifications and those of their counterparties. Finally, this paper touches on regulatory equivalence and how it may be available as a solution to achieving compliance with multiple regimes.