With the United
States set to continue international
financial reform discussions with G-20 partners in September 2013, 35 members
of the House of Representatives urged the SEC and CFTC to harmonize
cross-border derivatives regulations with each other, as well as with their
appropriately regulated global counterparts. In a letter to
CFTC Chair Gary Gensler and SEC Chair Mary Jo White, the House members
cautioned that the unilateral application of U.S.
derivatives regulations to other countries that are presently working on their
own complementary derivatives regulatory regimes will result in a flight of
swaps activity away from U.S.
banks overseas and further away from U.S. oversight. Further, while
ensuring a proper level of regulatory compliance abroad is imperative, the
failure to agree on a common regulatory framework poses risks and distortions.
For one thing, regulatory gaps would encourage regulatory arbitrage, warned the
House members, as market participants seek inappropriately regulated markets.
Other deleterious effects of inconsistent derivatives
regulation would be competitive imbalances among market participants based upon
the home jurisdiction of the participants and inadvertent violations as market
participants are forced to choose which regulatory regime to follow. Other
harmful effects would be isolating risk inside countries or jurisdiction
because of regulatory balkanization, which could create instabilities in the
risk profiles of individual countries’ markets. An overarching goal of the
harmonization of regulation is to provide for a sound and competitive
international derivatives marketplace, rather than merely just a safe U.S.
market.
The House members referenced a letter recently sent to
Treasury Secretary Jacob Lew by nine Finance Ministers and Michel Barnier, E.U.
Internal Market Commissioner, expressing concern at the lack of progress in
developing workable cross-border regulation of the OTC derivatives markets.
Left unaddressed, the failure to harmonize rules between the SEC, the CFTC, and
their global counterparts will have substantial negative effects on domestic
businesses operating abroad as well as the safety and soundness of the U.S.
and international financial systems.
More broadly, the House members pointed out that OTC
derivatives remain a crucially important financial tool for corporations,
agriculture providers, investors, and financial services firms attempting to
manage their risk. The Dodd-Frank Act enacted critical reforms to this
marketplace, formerly rife with regulatory gaps. Implementation of these
reforms, including clearing, trade reporting, higher capital levels, margin for
uncleared swaps, business conduct requirements, and periodic regulatory
reviews, will provide increased transparency and reduced risk in the OTC swaps
market.