It is essential for global financial reform that the SEC take the necessary steps to transpose IFRS in the United States since if accounting standards are different then capital requirements become different too, in the view of EU Internal Market Commissioner Michel Barnier, who asked what is the point of agreeing on capital requirements if their application leads to different results because of different accounting rules. In remarks at SIFMA, the Commissioner, while acknowledging that the US and EU have harmonized derivatives legislation, chided US authorities for not reining in bonuses as part of executive compensation reform.
The Commissioner said that the US could do more to control excessive risk taking by getting the incentives right. Excessive risk is at the expense of shareholders who have to provide additional capital, he said, and excessive risk is at the expense of society as a whole, as evidenced by the financial crisis. It is in everybody's interest that these risks are kept under control, he noted. While acknowledging that competent people should be rewarded, the Commissioner posited that the way compensation is structured can give wrong incentives and lead to excessive risk taking. While conceding that payment of bonuses is a very sensitive issue in the US, Commissioner Barnier noted that the EU has taken determined steps to reduce bonuses at financial institutions. Based on Financial Stability Board principles, one of which says that bonuses should diminish or disappear in the event of poor business unit performance, the EU has adopted binding rules that will apply to bonuses paid in 2010.
Regarding derivatives, Commission Barnier said that he has worked closely with CFTC Chair Gary Gensler to ensure that the final EU derivatives legislation is consistent with the approach taken by the Dodd-Frank Act. Consistent cross-border regulation is crucial, he observed, since 80 per cent of derivatives trading takes place in the United States and Europe. The Commissioner rejected US voices saying that the OTC derivatives provisions of the Dodd-Frank Act should be given a light implementation because the EU is being less ambitious.
Similar to Dodd-Frank, he said, the EU draft deals with requirements on central clearing parties and trade repositories. Other key aspects of the EU approach are additional capital requirements for contracts not centrally cleared, pre- and post- market transparency and the trading of OTC-derivatives on exchanges or electronic platforms, which will be addressed in upcoming proposals on reviewing the Capital Requirements Directive and the MiFID Directive.
Also, like Dodd-Frank, the EU adopted regulations for credit rating agencies involving, among other things, supervision and conflicts of interest. However, similar to the discussions going on in the US, the European Commission wants more reflection on the role of ratings, including a detailed look at the impact of ratings on some markets, such as sovereign bonds, where announcements have widespread consequences for markets and countries. Also, the EU wants to enhance competition by lowering barriers to entry in the market and reducing the market power of the existing agencies. More broadly, the Commission will examine the issuer-pays model. The Commission will start consulting stakeholders very soon on these issues.