A senior European regulator has argued that extraterritorial rules are justified despite their impact on other markets, during a recent visit to Hong Kong.
Such regulations exist due to the simple fact that markets are increasingly interconnected, says Steven Maijoor, chairman of the European Securities and Markets Authority (Esma).
“When we regulate European markets, we say to third countries that you can still be active in Europe. But when you do that, you need to comply with EU rules,” he tells AsianInvestor. “The negative version is of course called extraterritoriality. The positive version of that is called a level playing field for all those that are active in the European … landscape.”
Amid vocal criticism of the growing influence of European rules in Asia, Maijoor is keen to stress that that non-EU-based financial institutions can directly report to their local regulator, if Esma and the European Commission deem that their jurisdictions’ rules have a similar effect to those in Europe. This helps avoid the increased cost and effort of duplicating compliance, he notes.
For example, Esma views Australia, Hong Kong and Singapore's regulatory goals in governing clearing houses as equivalent to those of the European Market Infrastructure Regulation (Emir). Esma is awaiting a decision by the European Commission before the rules can be passed. (Under Emir, non-EU clearing houses outside must register with Esma to qualify to offer clearing services to EU institutions.)
But in December, Ashley Alder, chairman of the Asia-Pacific committee of the International Organization of Securities Commissions, had warned the European Commission against “imposing conditions and standards that are not relevant, appropriate or even feasible” on Asian clearing houses.
Alder, who is also CEO of Hong Kong’s Securities and Financial Commission, warned that such moves risk creating market fragmentation, reducing market liquidity and impacting EU financial institutions doing business in the region.
Asia has its complaints on European regulation, concedes Maijoor, but he has a mandate to balance the needs of EU member countries.
“You can understand that the EU market participants are saying to me, ‘make sure that the third-country market participants doing business in Europe are under the same rules’,” he says. “Which I think is reasonable, otherwise we would have unfair competition in the EU system.”
Maijoor sees use of the equivalence principle as a compromise, and says he is keen to see more memoranda of association signed with jurisdictions in Asia.
On the issue of complying with the Alternative Investment Fund Managers Directive (AIFMD), he concedes there are concerns. “AIFMD is clearly a work in progress. Some countries have already implemented AIFMD, [while others] are in the process of implementing it.”
Until the passporting system is implemented, costs will be higher, Maijoor concedes, but he expects costs to fall once the passport system is in place, and that it will follow a path similar to Ucits.
Once AIFMD is in effect – as is expected some time in 2015 – it will be possible to market non-EU alternative investment funds, such as those domiciled in Hong Kong, into the 28 member states, assuming firms meet the EU's requirements.
A January survey conducted by BNY Mellon found that the average cost of AIFMD compliance is expected to be $300,000 per institution. The figure does not include the one-off cost of implementing it, which some estimate at $250,000 per institution.
Meanwhile, asked whether he felt that Asian regulators have a fragmented voice, Maijoor was not keen to be drawn on the question. But he said that debates on regulatory reforms should be international and not conducted only between the EU and US.
“Obviously, there is no union of Asian countries and jurisdictions and, understandably, different views are coming from the Asian world,” he says. “It is up to the Asian partners to decide how they want to coordinate their positions."