Wednesday, November 23, 2011

SEC Chair Discusses International Implications of Derivatives Regulation at Hedge Fund Seminar

Implementing the derivatives regulatory regime mandated by the Dodd-Frank Act and bringing this wholly unregulated market under a regulatory umbrella has presented the SEC with unique challenges, especially for the Commission as a first mover internationally, said SEC Chair Mary Schapiro in a dialogue at the Managed Funds Association Outlook 2011 seminar. There are challenges coordinating derivatives regulations with the SEC’s global counterparts, said Chairman Schapiro, and also challenges within the United States coordinating between the SEC and CFTC. The two Commissions have different statutory foundations and different approaches to regulation that have grown historically over the years. There is also the fact that the commodities and securities swap markets, while they are all OTC derivatives markets, are not exactly the same, and that calls for some differences as well.

When all of the Dodd-Frank Title VII regulations are out for public comment, the SEC plans to publish for comment a detailed implementation plan so that investors and market participants can see very holistically how the Commission expects to sequence implementation of the regulations in a way that is logical and rationale. The public should be able to see a rational sequencing of all the regulations’ effective dates and be able to comment on those, and give the SEC some guidance; some good information and data about what it will take to put each of these rules into place.

The international questions around derivatives regulation are extraordinary, said the SEC Chair. Recently, the SEC had a session with its global regulatory counterparts in London to discuss the extraterritorial implications of Title VII and the regulations implementing the derivatives regime required by Dodd-Frank, and what this means for foreign institutions facing US customers, facing other US institutions or having affiliates in the US.

International questions permeate every regulation, said Chairman Schapiro, who added that SEC’s approach is going to be a holistic one. The Commission is going to set out a broad international release for comment from investors, market participants, and foreign regulators to ascertain the global reach of US derivatives regulations so as to avoid opportunities for regulatory arbitrage and opportunities for anti-competitive impact on US financial institutions.

Chairman Schapiro said that the SEC has benefited from the fact that the Financial Stability Board and most of the international jurisdictions have a common framework with the Commission. She also noted that the SEC has been having weekly calls with global counterparts to go line by line through its regulations and what is expected out of the Markets in Financial Instruments Directive (MiFID) and EMIR, the European Market Infrastructure Regulation; and how that will translate into real regulatory frameworks in Europe and how those might match up. The SEC and its global regulatory counterparts are concerned about possible regulatory gaps and duplication. These weekly sessions going through this in detail have been enormously helpful for all the regulators, she averred. The SEC Chair believes that the different securities regulators genuinely want to try to land in the same place. They want to have high standards that are achievable around the world so as not to create any distortions or dislocations.

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