Monday, September 01, 2014

Legacy of Commissioner Barnier Will Be Historic and Harmonized Financial Regulatory Reform

As the new European Commission begins to take shape this month, there will be a new European Commissioner for the Internal Market, essentially the Commissioner for Banking and Securities. It is thus appropriate to reflect on the accomplishments over the last five years of the momentous five-year tenure of Michel Barnier as E.U. Commissioner for the Internal Market. It was during this period that the reforms needed after the financial crisis were enacted and are being implemented. I believe that this makes the Barnier Commisssionership the most weighty in E.U. history.

It is by now evident that the E.U. did financial reform on a piecemeal stand alone basis, rather than passing a Dodd-Frank Act and doing it all with one omnibus legislative vehicle. Given the way the E.U. legislative framework works, this is probably how it had to go. Commissioner Barnier moved these various pieces of legislation through the process and achieved reform, while never forgetting the need for the global harmonization of financial regulation because, after all, this was a global financial crisis.

A partial list of legislation and regulations enacted during the Barnier regime shows the importance of that regime: a revised Accounting Directive, a revised Statutory Audit Directive, a new Recovery and Resolution Directive that parallels the orderly resolution authority in Title II of Dodd-Frank, the European Market Infrastructure Regulation (EMIR) to regulate OTC derivatives markets to parallel Title VII of Dodd-Frank, the Alternative Investment Management Directive to regulate hedge funds and private equity funds, the CRA Regulation to regulate credit rating agencies, and MiFID II. These were difficult to do but, in the end, were enacted.

But above all is Commissioner Barnier’s consistent and unwavering commitment to the harmonization of cross-border financial regulations to prevent regulatory arbitrage. Just recently, he said that the only way to ensure cross-border regulatory convergence and avoid arbitrage is a solid, treaty-based system for regulatory cooperation. Only a treaty-based system could support a mutual E.U.-U.S. assessment of financial regulations that is outcome-based and backed up by specific arrangements to govern E.U.-U.S. regulatory cooperation. That is why Commissioner Barnier supports including an agreement on regulatory cooperation within the framework of the Trans-Atlantic trade negotiations.

Commissioner Barnier also negotiated a Path Forward with the CFTC on derivatives regulation. He recently noted that technical talks with the CFTC are progressing well and he is confident that the E.U and the CFTC will be able to agree on outcomes-based assessments of their respective derivatives regulations and on aligning key aspects of margin requirements to avoid arbitrage opportunities. If the CFTC also gives effective equivalence to third country central counterparties, deferring to strong and rigorous rules in jurisdictions such as the E.U., the European Commission will be able to adopt equivalence decisions very soon, he predicted.

This great work of equivalence and substituted compliance, call it what you wish it means respect for an equivalent regulatory regime, will continue into the next Commission. If nothing else, the G20 will insist on it. This is perhaps the main legacy of Commissioner Barnier, his fierce and unswerving dedication to the goal of the G20 for harmonized cross-border financial regulation and the avoidance of regulatory arbitrage.