Eight major industry bodies have warned the European Commission's internal markets commissioner, Michel Barnier, and Timothy Geithner, US secretary of the treasury, that uncoordinated rulemaking for derivatives trading could increase risk and cost.
“Under the proposed rules, investment managers may have to follow two different sets of rules for client transactions,” said Jane Lowe, director, markets, at buy-side trade body the Investment Management Association (IMA). “Also, investment in less developed markets could be restricted by any attempt to overlay one nation's laws over another's. We therefore urge regulators in the EU and US to pursue a more joined-up approach.”
In a letter to the politicians ultimately responsible for overseeing financial regulatory reform in the US and Europe, the associations expressed concern over the effect of extra-territoriality in regulatory efforts. Because the derivatives market is global, participants would often find themselves operating under two sets of rules, potentially creating “ambiguity and problematic extra-territorial challenges and issues of legal uncertainty and misunderstanding which might give rise to material risk”.
They noted that duplication of regulatory regimes threatened to create an additional authorisation burden for entities that are significant participants in the global swap market, and that margin requirements being applied to subsidiaries of regulated firms in other jurisdictions could leave the subsidiary subject to duplicate requirement regimes. The letter urged regulators to develop “mutual recognition arrangements where each would limit the extra-territorial reach of their regulation so long as a firm complies with their home country regulations” as a solution.
In addition, central counterparties should be required to adhere to standards that would allow them to be recognised in other jurisdictions as conflicting clearing requirements would be “impossible to comply with”.
The requirement under the US Dodd-Frank Act that swap data repositories are indemnified from overseas regulators before agreeing to share data with them was seen as unworkable as it “undermines the ability of trade repositories to provide coherent information on risk in the derivatives business to regulators throughout the world”.
Failure to improve coordination of regulatory development would hurt the commitment by the Group of 20 countries to implement standards avoiding “fragmentation of markets, protectionism and regulatory arbitrage” they added.
“We believe that regulators should seek to limit the damaging effects of divergence, either by consultation with international counterparts in preparation of legislation, or by resolving these differences in the course of implementation of legislation” the letter concluded.
The document was signed by chief executives of the International Swaps and Derivatives Association, the Global Financial Markets Association, the European Banking Federation, the Alternative Investment Management Association, Futures and Options Association, Wholesale Market Brokers Association and the IMA.
The final delivery of derivatives regulation in Europe has been delayed until September at the earliest, following disagreements between politicians and member states over issues including the scope of derivatives to be covered and the power of national authorities. In the US deadlines also been set back, as regulators came under considerable time pressure and were urged by politicians not to rush the delivery of rules.