US regulators need to take a less
mechanical approach to determining whether to accept foreign regulatory
standards for OTC derivatives trading, according to two industry trade bodies.
Derivatives trade body, the International
Swaps and Derivatives Association (ISDA) and US buy-side association, the
Investment Company Institute (ICI), both suggest that an overly rigid
application of US regulatory standards could have a significant negative effect
Both the Securities and Exchange Commission
(SEC) and the Commodity Futures Trading Commission (CFTC) have said they are
seeking to apply a form of substituted compliance, where US banks trading
abroad would not be subjected to their oversight if there are equivalent OTC
derivatives trading rules in those jurisdictions.
In a letter to the SEC this week, ICI’s
general counsel, Karrie McMillan, and managing director, Dan Waters, wrote: “we
urge the SEC not to apply its substituted compliance framework in an overly
mechanical manner that could effectively preclude a substituted compliance
determination with respect to a similar foreign regime.”
The ICI is concerned that in some areas,
such as the timely reporting of swap trades, foreign regulations could fail to
qualify for substituted compliance due to minor technical differences, such as
different reporting timeframes or differences in trade information
“We encourage the SEC to look holistically
at the foreign regulatory authority regulatory framework for reporting to
determine whether it broadly achieves the G-20 goals of transparency of the
derivatives markets,” the letter said.
ISDA has also called for regulators to take
a less technical approach to substituted compliance. Instead of focusing on
specific regulatory rules developed since the Group of 20 met to agree on
international financial regulation in Pittsburg in September 2009, they should
focus on whether different regulations achieve the key goals of the G-20.
ISDA said markets should instead focus on a
principles-based approach, and identify whether a foreign regulatory regime
meets the common principles agreed by the G-20.
“All comparisons should evaluate regulatory
regimes against these common principles, rather than requiring identical or
element-by-element correspondence of rules,” a statement from ISDA read.