Monday, November 19, 2012

Treasury Official Endorses Substituted Compliance Principle for Cross-Border Derivatives Transactions

Since the derivatives market is global and highly mobile, said Mary Miller, Treasury Under Secretary for Domestic Finance in recent remarks, one regulator or one jurisdiction cannot effectively enact reforms alone of the derivatives market. Thus, Treasury strongly support efforts by U.S. market regulators to align their rules on transactions that are subject to regulation under the Dodd-Frank Act with global regulators. To provide certainty to global market participants, many of whom are hedging risks that are integral to their core operations, the U.S. market regulators should strive to establish consistent standards that apply to cross-border derivatives transactions of similar types.

Treasury also supports SEC, CFTC and other US regulators as they work with their international counterparts to develop robust frameworks for effective substituted compliance wherever appropriate, while always keeping in mind the risks of regulatory arbitrage and the need for transparency.  U.S. market regulators should also continue to work with their foreign peers to develop consistent frameworks to avoid unnecessary and unproductive conflicts that inhibit the development of coordinated global rules. Ms. Miller emphasized that this will help increase confidence in markets. 

As the SEC and CFTC  focus on completing derivatives regulations that work domestically and internationally, noted the Treasury official, the reforms should be guided by the key pillars of derivatives market reform: (i) trades should be cleared where appropriate and subject to a strong margin regime, (ii) the most standard derivatives should move to trade execution platforms, and (iii)  prudential regulations of large dealers and large market participants should provide enhanced disclosure to the public and regulators.