Wednesday, May 01, 2013

In Letter to Treasury, Global Finance Ministers Urge Consistent Cross-Border Regulation of Derivatives under Substituted Compliance or Equivalence

In a letter to U.S. Treasury Secretary Jack Lew, with copies to the Chairs of the SEC and CFTC, global Finance Ministers expressed their concern at the lack of progress in developing workable cross-border regulations as part of reforms of the OTC derivatives market. The ministers, joined by E.U. Internal Market Commissioner Michel Barnier, said that they are already starting to see evidence of fragmentation in this vitally important financial market as a result of a lack of regulatory coordination. Without clear direction from global policymakers and regulators, they cautioned, the derivatives markets will recede into localized and less efficient structures, impairing the ability of global business to manage risk. In turn, this will dampen liquidity, investment and growth. The letter was signed by, among others, U.K. Chancellor of the Exchequer George Osborne, German Finance Minister Wolfgang Schäuble, and Japanese Finance Minister Taro Aso.

The ministers said that they share a common commitment with respect to OTC derivatives reform, and are implementing regulations across very different markets with different characteristics and different risk profiles, to support this global initiative. They warned that an approach in which jurisdictions require that their own domestic regulations be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is simply not sustainable. Market places where firms from all respective jurisdictions can come together and do business will not be able to function under such burdensome regulatory conditions.

A coherent collective solution is therefore needed for cross-border derivatives, said the Finance Ministers, and regulators must work together to avoid outright conflicts in regulation and minimize overlaps as far as possible. In this regard, mutual recognition, substituted compliance, exemptions, or a combination of these would all be a valid approach, and careful consideration should be given with respect to registration requirements for firms operating across borders. Recent experience shows that these discussions can only proceed if they are based on a shared understanding of the overall outcome being sought.

The senior officials emphasized that the basic principles on which cross-border derivatives regulations should be based are clear and widely shared. They urged the SEC, CFTC and other regulators to carefully consider the principles to avoid cross-border conflicts.