Monday, February 08, 2021

SIFMA urges Biden admin to think globally on U.K., China, and data transfer policy

By Lene Powell, J.D.

Emphasizing the importance of international regulatory coordination for the U.S. financial recovery, SIFMA has given the Biden administration a list of priorities for its cross-border financial services agenda. In a statement, Peter Matheson, managing director of international policy & advocacy at SIFMA, said the administration should particularly aim for international regulatory consistency in three areas: redefining the U.S.-U.K. relationship following Brexit, working toward a level playing field in China, and developing a shared understanding on data transfers that avoids aggressive data localization.

Costs of inconsistency. According to Matheson, the financial services industry is perhaps the most globally integrated of all service industries, yet it is still typically subject to regulation at the national level. This causes regulatory inconsistencies that, according to one study, cost the global economy $780 billion per year. Regulatory fragmentation such as capital and liquidity ring-fencing can also undermine global financial stability, said Matheson.

Although there are "well-developed" mechanisms to promote cross-border regulatory cooperation, Matheson believes these can be strengthened and improved. In his view, particular areas deserving focus include sustainable finance and the implementation of the Basel III capital reforms and guidelines around operational resiliency.

Defining a new U.S.-U.K. relationship. Matheson noted that U.S. and U.K. have begun to redefine their bilateral relationship following the exit of the U.K. from the European Union. According to Matheson, this provides an opportunity to establish a new, best standard in cross-border regulatory coordination and supervisory cooperation, and SIFMA has set out a detailed vision describing what that might entail.

Matheson observed that regulatory coordination would also support a future U.S.-U.K. trade agreement that could yield significant and widespread benefits for both countries’ economies.

Promoting a level playing field in China. Given U.S. exports of over $4 billion to China per year, plus another $3 billion supplied by U.S. subsidiaries and affiliates based in China, it remains a priority goal for China to open its financial system to full and fair foreign competition. Matheson noted that the United States and China reached a Phase One trade agreement in January 2020, which cemented landmark commitments by China.

As work progresses in establishing a level playing field with China, it will be crucial for China to fully deliver on its commitments and have processes for robust and regular monitoring and enforcement, said Matheson. To this end, SIFMA’s CEO Ken Bentsen chairs the Engage China Coalition, a group of ten financial services trade associations that work to promote a U.S./China relationship that maximizes benefits to the U.S. economy.

Free-flowing cross-border data. According to a McKinsey estimate, cross-border data flows increased global GDP by 10 percent alone in the decade up to 2014. In Matheson’s view, this underscores the importance for the financial services industry to be able to transfer data across borders and locate servers wherever needed. Yet in recent years, many markets have implemented data localization policies hindering the free flow of data, imposing economic costs both on the industry and on the GDP of countries implementing such regulations.

But trade agreements can help ensure the free flow of data, said Matheson. For example, the United States, Mexico, Canada Agreement (USMCA) was the first trade agreement that included a prohibition on forced data localization, conditioned on regulators retaining access to that data wherever it be stored. Similarly, the U.S. Japan Digital Trade Agreement of October 2019 also ensured that data can be transferred across borders by all suppliers, including financial service suppliers. Moreover, the U.S. and Singapore put forth a shared understanding on data transfers in 2020.

Matheson urges that the U.S. must build on this foundation, begun in the Obama administration and continuing in the Trump administration, and protect financial services from policies that constrain the free flow of data or necessitate locating servers in particular jurisdictions. This should include ensuring the WTO Joint Statement Initiative (JSI) negotiations on digital trade also discipline unnecessary or discriminatory data localization mandates and data transfer restrictions, said Matheson.

In conclusion, Matheson believes that as governments around the world look to innovate and recover from the COVID-19 crisis in a sustainable, equitable way, they should recognize the cross-border nature of the financial services industry in shaping policy. Strengthening the competitiveness of U.S. financial services through policies on regulatory cooperation, data, and relationships with major trade and investment partners will help accelerate the rate of recovery and help establish a stronger foundation for the economic future of the U.S., said Matheson.