Wednesday, September 11, 2013

G20 Leaders Pledge to Complete Derivatives Regulation, End Too-Big-to-Fail, and Finish Reform of the Shadow Banking System

While lauding the substantial progress that major jurisdictions have made in implementing internationally consistent reforms to their financial systems, the G20 Leaders in a final communiqué from the St. Petersburg, Russia Summit urged these jurisdictions to not lose momentum and to finish the job of financial regulatory reform. The G20 were pleased to note that all major jurisdictions have implemented new global capital standards under Basel 3; have completed frameworks for OTC derivatives to be traded on exchanges or electronic trading platforms, centrally cleared, and reported; have identified globally systemically financial institutions and subjected them to heightened prudential standards to mitigate the risks they pose; have set up orderly resolution procedures for large, complex financial institutions without taxpayer loss; and have begun to address potential systemic risks to financial stability emanating from the shadow-banking system. This regulatory effort is unprecedented, said the Leaders, but there is still more work to be done.

The G20 took a strong stand to end too-big-to-fail. In this regard, they fully endorsed the implementation of the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for all parts of the financial sector that could cause systemic problems. They pledged to remove obstacles to cross-border resolution of globally significant financial firms.

The Leaders asked the FSB, in consultation with standard setting bodies, to assess and develop proposals by the end of 2014 on the adequacy of global systemically important financial institutions' loss absorbing capacity when they fail. Recognizing that structural banking reforms can facilitate resolvability, they called on the FSB, in collaboration with the IMF and the OECD, to assess cross-border consistencies and global financial stability implications, taking into account country-specific circumstances, and report to the next Summit. Similarly, they asked the FSB, in consultation with the International Organization of Securities Commissions (IOSCO), to develop methodologies for identifying global systemically important non-bank financial institutions by the end of 2013. They also asked the Committee on Payment and Settlement Systems and IOSCO to continue their work on systemically important market infrastructures.

The G20 Leaders welcomed the FSB's report on progress in OTC derivatives reforms, including members' confirmed actions and committed timetables to put the agreed OTC derivatives reforms into practice. They also praised the recent set of understandings by key regulators on cross-border issues related to OTC derivatives reforms, as a major constructive step forward for resolving remaining conflicts and inconsistencies globally, and look forward to the speedy implementation of these understandings once regimes are in force and available for assessment.

The Leaders endorsed the principle that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, paying due respect to home country regulation regimes. The G20 asked the regulators, in cooperation with the FSB and the OTC Derivatives Regulators Group, to report on their timeline to settle the remaining issues related to overlapping cross-border regulatory regimes, and regulatory arbitrage.

The G20 called for accelerated progress in reducing reliance on credit rating agencies, in accordance with the FSB roadmap. They encouraged further steps to enhance transparency and competition among credit rating agencies and look forward to IOSCO's review of its Code of Conduct for credit rating agencies.

The Leaders support the establishment of the FSB's Official Sector Steering Group to coordinate work on the necessary reforms of financial benchmarks. And, they endorsed IOSCO's Principles for Financial Benchmarks and look forward to reform as necessary of the benchmarks used internationally in the banking industry and financial markets, consistent with the IOSCO Principles.

The Leaders welcomed the progress achieved in developing policy recommendations for the oversight and regulation of the shadow banking system, as an important step in mitigating the potential systemic risks associated with this market. At the same time, they recognized that nonbank financial intermediation can provide an alternative to banks in extending credit to support the economy.

The Leaders pledged to work towards timely implementation of the recommendations while taking into account country specific circumstances. They welcomed the respective FSB reports in this area and agreed on a straightforward roadmap for work on relevant shadow banking entities and activities with clear deadlines and actions to progress rapidly towards strengthened and comprehensive regulation appropriate to the systemic risks posed.

As part of the growing global consensus on tax evasion and tax avoidance, the G20 Leaders commended the progress recently achieved in the area of tax transparency and fully endorsed the OECD proposal for a truly global model for multilateral and bilateral automatic exchange of tax information. Calling on all other jurisdictions to join them by the earliest possible date, the G20 committed to automatic exchange of tax information as the new global standard, which must ensure confidentiality and the proper use of the information exchanged.

They fully support the OECD work with G20 countries aimed at presenting such a new single global standard for automatic exchange of tax information by February of 2014 and to finalizing technical modalities of effective automatic exchange by mid-2014. In parallel, they expect to begin to exchange information automatically on tax matters among G20 members by the end of 2015.

They called on all countries to join the Multilateral Convention on Mutual Administrative Assistance in Tax Matters without further delay; and look forward to the practical and full implementation of the new standard on a global scale.

The Leaders asked the Global Forum to establish a mechanism to monitor and review the implementation of the new global standard on automatic exchange of tax information.