Conflicting Regulations Vex Markets

Terry Flanagan

The emergence of the Dodd-Frank Act and European Markets Infrastructure Regulation threaten to undercut the original G20 objectives established in Sept. 2009.

In the United States, the SEC and CFTC are deep into the process of implementing derivates rules under FinReg, while in Europe, the European Parliament has temporarily applied the brakes legislation on CCPs, derivatives, and market structure, known as EMIR.

That means that European regulations will not be in place until 2012 at the earliest, well after rules have been implemented in the United States.

“Dodd-Frank’s potential to overlap with EMIR is a major worry for market participants,” Brett Hillis, partner in the energy and natural resources practice at Reed Smith, told Markets Media. “They do not want the same transactions to be subject to two sets of conflicting regulation, one on each side of the Atlantic. Our clients are watching developments closely and assessing the implications for how to structure their businesses.”

On trade repositories, Dodd-Frank’s requirement that U.S.-based swap data repositories (SDRs) obtain indemnification from foreign regulators as a pre-condition to data sharing undermines the ability of trade repositories to provide coherent information on risk in the derivatives business to regulators, according to eh derivatives industry.

“The indemnification provision in the data security area has the potential to increase systemic risk by undermining the ability of regulators and market participants to obtain a complete, comprehensive and unfragmented view of market data,” said Dan Cohen, managing director and head of government relations for DTCC. “This provision has the significant, but unintended, potential to lead to a proliferation of local repositories across Europe and Asia, creating data fragmentation.”

If fragmentation occurs, it would be extremely difficult for regulators to obtain a full picture of any particular OTC derivatives asset class.” It is critical that these types of barriers to data sharing be modified or eliminated to successfully achieve OTC derivative market transparency,” Cohen said.

The EU has taken a bifurcated approach with different laws addressing execution and clearing. Under the EU approach, the EMIR proposals cover clearing requirements and trade repositories, while MIFID II covers trading.

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