Kenneth E Bentsen, the head of one of the industry's largest trade associations says international regulatory bodies need to do more to ensure coordination between national regulators on the construction and timetable of rulebooks for global derivatives markets.
It has been five years since G20 leaders met in Pittsburgh and declared their commitment to a globally coordinated approach to reform the financial system. That commitment is now in jeopardy. As world financial leaders meet this month at the G20 meetings in Australia, it is vital that they redouble their focus on regulatory coordination to avoid fragmentation of markets, protectionism and regulatory arbitrage that could stifle economic growth.
Global financial markets are intertwined, and regulators must acknowledge that policies and practices in one region will have a ripple effect across the world’s financial centres. To be clear, this is not a question about whether jurisdictions are pursuing the reforms agreed to at the Pittsburgh summit. In fact, according to the Financial Stability Board (FSB), the International Organisation of Securities Commissions (Iosco) and industry sources, all 20 jurisdictions are pursuing dramatic new rules regarding capital, prudential regulation and over-the-counter (OTC) derivatives.
Top-down approach
Despite regulators’ shared commitment to key objectives, the extent of inconsistent and overlapping implementation has been troubling. Regulators have often focused on bottom-up implementation of reforms in their home jurisdictions, taking into account today’s interlinked global markets either by applying their home country reforms extraterritorially or erecting barriers to efficient cross-border business. G20 financial leaders should encourage their national authorities to instead utilise a coordinated, top-down approach that leverages Iosco as a meaningful forum to develop and consistently implement regulatory standards across jurisdictions that obviate the need for duplicative or conflicting regulation.
Such an outcome-based approach would meaningfully enhance the coordination and consistency of regulatory oversight of global markets, providing much-needed clarity to financial market participants. Furthermore, it would facilitate and streamline the ability of one jurisdiction to recognise the rules of another when financial activities cross borders.
Regulatory recognition is essential to avoiding market disruptions that hamper global economic growth. Rules across jurisdictions may not always be a perfect match or be on an identical timeline, but where regulations are responsible and comparable, based on the same global principles, and lead to essentially the same end result, regulators should recognise each other’s regimes instead of attempting to directly oversee foreign market participants already subject to comparable regulation, limiting cross-border trading or funding activities in the process.
Must do better
Current efforts to reform the global derivatives markets highlight the opportunity for better regulatory coordination and consistency as different jurisdictions move forward. Individual jurisdictions have acted as with Dodd-Frank in the US, European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) in Europe, and similar measures in Asia, resulting in a multitude of new entity and transactional rules being implemented in each jurisdiction. Notwithstanding timing differences as to when such rules will be in full force, as is the case in all of the jurisdictions, all seek to address the goals set out in Pittsburgh to promote central clearing, margin, capital, conduct and trade reporting.
But many questions remain regarding the extraterritorial or cross-border application of each regime’s rules, especially when it comes to regulation of the market infrastructures that stand at the centre of the reforms. By working together to clarify appropriate limits on local jurisdiction, as well as reduce conflicts and redundancies between jurisdictions, international regulators could remove much of the uncertainty that hangs over the marketplace.
The FSB, in a recent report to the G20 finance ministers and central bank governors, highlighted these challenges and the importance of regulatory recognition in over-the-counter derivatives regulation, where it noted that “deference – in part or in full – to another jurisdiction’s OTC derivatives regulatory regime, where appropriate, is an important tool for addressing some of the issues arising from differences in the regulatory reforms that jurisdictions undertake to meet the G20’s overall goals”. Derivatives are one of the most important risk management tools, so regulators must be vigilant to ensure that these transactions can work seamlessly across borders.
In addition to a broader shift to a top-down approach focused on the development of global standards, regulators should adopt three 'quick to implement' recommendations for improving cross-border regulatory coordination, which we believe Iosco could facilitate. These include efforts to facilitate enhanced international dialogue between political officials and legislative/regulatory authorities at the initiation of policy development; international coordination among regulators in establishing reasonable implementation timetables for new rules; and the development of bilateral co-operation/consultation mechanisms for identifying areas of conflict and bringing together regulators and market participants to establish international solutions.
This is not about regulatory arbitrage or 'a race to the bottom' as some have suggested, but rather a path to the development of a global rule book. Well-developed regulation that contributes to efficient and stable financial markets is integral to sustainable economic growth. It is our hope that the G20, FSB and Iosco can meaningfully enhance cross-border regulatory coordination by recognising the global realities of today’s markets and focusing on the development and consistent implementation of global regulatory standards.
Kenneth E Bentsen is chief executive of the Global Financial Markets Association.
