Monday, June 06, 2011

Secretary Geithner Calls for Global Standards for Margin on Derivatives to Buttress Central Clearing

As the SEC and CFTC work to implement the derivatives provisions of Dodd-Frank and the EU moves towards legislation regulating derivatives, Treasury Secretary Tim Geithner emphasized the need for global minimum standards for margins on uncleared derivatives trades so as to avoid regulatory arbitrage. In remarks at the International Monetary Conference in Atlanta, he warned that a lack of international consensus on margin for these derivatives trades would undermine the broader reform of the central clearing of derivatives. In turn, this would result in the concentration of derivatives risk in jurisdictions with the least oversight. A global approach to margin will prevent a race to the bottom, he said, and enhance the safety of global financial markets. He vowed to work with international regulatory counterparts to develop a global margin standard on uncleared derivatives trades.

More broadly, the Secretary is committed to building a more level playing field internationally as the US implements the Dodd-Frank financial regulatory reforms. As the US acts to contain risk, the chances that it will move to other markets must be minimized. He cautioned that countries that may wish to take advantage of the rise in US regulatory standards should note that the UK’s experiment in ``light touch’’ regulation to attract business to London from New York and Frankfurt ``ended tragically.’’

In earlier meetings with European Commissioner for Internal Market and Services Michel Barnier, Secretary Geithner emphasized the intense focus on making certain that all key financial centers live up to the G-20’s commitment on the central clearing and trading of derivatives. In addition, he underscored the U.S.’s continued commitment to implementing its Basel agreements rigorously and on the agreed timelines, and the firm expectation that others do the same. The Secretary also said that the fundamental objective of the Financial Stability Board’s work on compensation is focused on reducing incentives towards excessive risk taking, an approach that the US believes to be most effective to maintaining financial stability, rather than prescribing particular designs or levels of individual compensation.

Last October, Commissioner Barnier and Secretary Geithner reaffirmed their commitment to continue their strong and close bilateral co-operation on regulatory reform in the OTC derivatives markets. The officials said that this co-operation has allowed for the proposed new rules regarding the clearing of OTC derivatives and the development and supervision of derivatives infrastructure to be consistent and implemented in an open, convergent, and non-discriminatory manner. They also confirmed their commitment to achieve convergence during the implementation and the finalization of all the OTC derivatives reforms on both sides of the Atlantic.