The Financial Conduct Authority is calling for a sustained focus on “cross-border legal complexities”, though chairman John Griffith-Jones praised joint US and EU efforts on the cross-border implementation of derivatives clearing.
Speaking at the inaugural Exchange of Ideas event hosted by Clearstream in London on Monday, Griffith-Jones noted that, “regulators have worked extremely hard to make sure that increasing standards of risk management do not result in greater fragmentation and a drop in liquidity provided”, but added that, “alignment is no easier in financial markets than in other areas”.
His comments coincided with the release by the Financial Stability Board (FSB) of its seventh semi-annual progress report on implementation of OTC derivatives market reforms. The report finds “significant progress” towards the G20’s 2009 commitments to improved transparency, systemic risk mitigation, and protection against market abuse. However, it acknowledges areas where further work is needed, including issues of cross-border consistency.
Griffith-Jones singled out the work of the OTC Derivatives Regulators Group under the aegis of the FSB as playing a vital role in addressing several cross-border issues.
These include concerns raised by market participants about compliance with multiple regimes. “Authorities have noted a number of differences that have emerged between rules being implemented across jurisdictions,” the report notes. Some relate to the scope of similar regulatory requirements, while others reflect divergences in their application.
One key area of concern identified is the need for authorities to allow cross-border clearing and trading infrastructure to operate in their jurisdictions. “Absent infrastructures being permitted to operate in relevant jurisdictions, a cross-border transaction may not be able to be cleared on a [central counterparty] or traded on a platform, which may lead to a greater reliance on trading relationships with counterparties located in their jurisdiction,” the report notes.
Addressing the need for further coordination, Griffith Jones called for regulation that reflected the reality of the market place. “The question is ‘how’ rather than ‘whether’ to coordinate and we now have some extremely important pieces of architecture to facilitate or mandate co-operation,” he observed. “Siloed regulation risks being expensive, burdensome and overly complex,” he argued. He insisted that national regulators are only overseeing a part of a global marketplace. “The public spotlight will fall on areas where we could align approaches more successfully,” he warned.