Isda Delineates Harmonization Principles

Terry Flanagan

The International Swaps and Derivatives Association has outlined a set of principles designed to help achieve the widely held goal of a more harmonized framework of international derivatives regulations.

The principles, which incorporate views expressed by international regulators and market participants, are intended to guide the development of frameworks and processes for inter-jurisdictional recognition of derivatives regulation through a principles-based substituted compliance methodology.

“Isda undertook the development and implementation of these principles for developing substituted compliance methodology to further the goal that we believe everyone shares: a coherent, effective and harmonized international regulatory framework,” said Stephen O’Connor, Isda chairman. “Inter-jurisdictional recognition of and consistency in derivatives regulation is essential in building safe and efficient financial markets.”

President Obama, meanwhile, met with financial regulators on Monday to discuss the ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Obama commended the regulators for their work but stressed the need to finish implementing the critical remaining portions of the Dodd-Frank Act in order to prevent the type of financial harm that led to the Great Recession from ever happening again, the White House said in a statement.

The group also discussed opportunities to continue interagency coordination, including through the Financial Stability Oversight Council, and the need to remain responsive to new risks in the financial system.

“Today’s meeting between President Obama and all of the federal financial regulators is an important reminder that the work on Dodd-Frank continues,” said Sifma president Kenneth Bentsen. “The industry remains broadly supportive of reform that ensures the safety and soundness of the financial system, and we look forward to continuing to be a productive participant in the rulemaking process. As regulators move ahead with the rulemaking process, they must focus on getting the remaining rules done right because poorly written rules could harm our strong capital markets that support a strong economy and help Main Street Americans succeed.”

Isda suggests that an effective framework be grounded in the declarations issued by the G-20 following the Pittsburgh and Cannes meetings. These goals include clearing of standardized derivatives; exchange/electronic trading, where appropriate; reporting to trade repositories; higher capital requirements for non-cleared trades; and margin requirements for non-cleared trades.

Regional and national regulators should evaluate the other’s regimes to allow for a principles-based approach to cross-border compliance, Isda said.

For purposes of substitute compliance or equivalence, comparisons of one jurisdiction’s requirements to another’s may use a variety of analytical methods, all of which must start with identification of a set of common principles that elaborate on the G-20 regulatory goals.

Isda noted the recent initiative by Iosco in this area and the announcement of its Task Force on Cross-Border Regulation. Isda said that Iosco can play a vital role in facilitating bilateral or multi-lateral inter-jurisdictional recognition efforts which will greatly help markets to progress to a consistent international framework that avoids duplication or jurisdictional over-reach.

To illustrate the proposed methodology, Isda also published examples of how the principles will apply to various areas within derivatives regulation. These examples have been developed and organized in relation to three of the five primary goals of derivatives regulation issued by the G-20.

For example, substituted compliance standards for the clearing mandate should permit application of another jurisdiction’s clearing exceptions where the exceptions are based on fundamentally-shared policy and content judgments. This exception should prevail over any general rule for comparing regulatory regimes favoring a “stricter rule” approach.

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