Markets Seek Regulatory Clarity

Terry Flanagan

Regulators issue principles for financial market infrastructures such as CCPs, CSDs and trade repositories.

Efforts to develop a unified, global framework for market infrastructure are being hampered by competing regulations across jurisdictions, market participants say.

While global regulators seek to seek to adopt standards for critical financial market infrastructure such as CCPs and trade repositories, national and supranational legislation in the U.S. and Europe is being viewed as an obstruction.

A consultative report issued this week by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) enunciates principles designed to apply to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively “financial market infrastructures” or “FMIs”).

While most principles in the report are applicable to all types of FMI, a few principles are only relevant to specific types of FMIs.

For example, because trade repositories don’t face credit or liquidity risks, the principles on those risks aren’t applicable to TRs, while Principle 24 on disclosure of market data by TRs applies only to TRs.

In addition, certain principles apply in a specific way to a specific type of FMI. For example, Principle 4 on credit risk provides specific guidance to payment systems, securities settlement systems, and CCPs.

The derivatives industry is concerned about the absence of details on how the proposed CPSS/IOSCO principles will interaction with other regulatory initiatives impacting FMIs and the derivatives markets, including the U.S. Dodd-Frank Act and the European Union’s EMIR legislation on OTC derivatives, central counterparties and trade repositories.

The task is complicated by the fact that the U.S. is far ahead of other jurisdictions in crafting a new swaps regulatory regime.

“Clarity is emerging very slow around Dodd-Frank, but it seems the EU is picking up the pace with EMIR in particular,” Jeffrey Wallis , managing partner of SunGard Global Consulting Services, told Markets Media.

“The EU is using the directive framework approach which is fast-tracking the effort,” said Wallis. “This will help catch up to Dodd-Frank and potentially pass it depending on how the political agenda impacts Dodd-Frank in the U.S. Most financial institutions are moving ahead knowing that there will be a first mover advantage and a service that can be provided to their trading partners particularly around Title VII and EMIR.”

OTC reforms had been delineated at a meeting of the G20 in Pittsburgh in 2009, which mandated that reforms be in place by the end of 2012, but the need to reconcile the Dodd-Frank Act with other supranational regimes makes that problematic.

Regulators will seek to resolve differences resulting in incompatible regulatory requirements that may make it impossible for global players to simultaneously comply with competing but inconsistent regulatory requirements. Other differences, however, that reflect different regulatory philosophies, are likely to persist and will represent differences global markets will have to live with.

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