Buy-side associations have backed the substance of a letter from nine governments warning of damage to derivatives markets unless the US abandons its plan to subject overseas subsidiaries of US entities to Dodd-Frank.
In a letter to US Treasury Secretary Jack Lew, eight finance ministers and a European commissioner claimed markets would be unable to function if the US required that its own domestic regulatory rules be applied to their firms’ derivatives transactions in broadly equivalent regulatory regimes abroad.
The letter – whose signatories included the finance ministers of Russia, Japan, Germany and Brazil – decried the lack of progress among regulators in developing “workable” cross-border rules. Further delay, it said, would “dampen liquidity, investment and growth”.
As an alternative to applying Dodd-Frank to entities based overseas, the signatories suggested mutual recognition, substituted compliance, exemptions, “or a combination of these”.
Futures and Options Association chairman Anthony Belchambers on Tuesday welcomed signs that both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) had recognised the need for modifications to Dodd-Frank’s extraterritoriality provisions, including substituted compliance. An open letter signed by industry bodies including the Futures and Options Association, ISDA and the ICMA last month claimed regulatory extraterritoriality was undermining the G20 reform agenda.
Earlier this month Securities and Exchange Commission chairperson Elisse Walter lent her support to substituted compliance as part of a “common sense, flexible approach” to cross-border derivatives, though she said the US would reserve the right to insist on compliance with US regulations.
Belchambers said he was optimistic international securities body IOSCO would engage with the industry over concerns that cross-border derivatives markets would become unnecessarily complex and difficult to access. “But IOSCO can’t force people to do things. It needs to become more like the European Securities and Markets Authority, building consensus – with a bit of a stick,” he said.
Meanwhile, Jane Lowe, director of markets at the Investment Management Association (IMA) said in an email the association was “fully supportive” of this week’s letter.
“This is an important issue for most of our members and it needs to be sorted,” she said.
Extraterritorial concerns have added to delays in Dodd-Frank implementation, although concerns persist for extraterritorial nature of impending European legislation, which may affect US market participants.
The European markets infrastructure regulation (EMIR) and the proposed financial transaction tax led by 11 EU states may adversely affect US market participants engaged in cross-border activity, in trading of instruments issued within participating member states.