Thursday, August 08, 2013

House Members urge SEC and CFTC to Harmonize Derivatives Regulations both Domestically and Globally

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.