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 on markets.
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 specifications.
“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.