04.15.2014
By Terry Flanagan

Regulatory Harmonization in Focus

As regulators across the U.S., Europe and Asia move forward with new derivatives regulations, the concern among market participants is that the end result will be a patchwork of different rules that inhibit global trading.

Mark Barber, deputy treasurer of global relations at General Electric’s GE Capital finance unit, noted that multinational companies need to leverage derivatives markets to manage risks related to currency conversion, cash management and other issues.

Speaking in New York on Monday at the Paris Europlace International Financial Forum 2014, Barber said GE supports regulators’ broad objectives of creating more resilient and transparent derivatives markets, but the regulations must be reasonably in sync across borders or the initiative may backfire.

“Having harmonized rules across borders is important,” Barber said. “Otherwise you have complexity and costs that change behavior.”

About 53% of GE’s $150 billion annual revenue is generated outside the U.S., Barber said. As an ‘end user’ of derivatives, GE uses futures and swaps for such purposes as asset-liability management and hedging of certain exposures. As an indication of the difficulties in navigating different regulatory systems across borders, Barber said GE and its subsidiaries have different categorizations according to Dodd-Frank in the U.S. and Emir in Europe.

The U.S. Commodity Futures Trading Commission has at least temporarily eased the compliance burden on market participants by issuing multiple no-action relief letters over the past few months, noted Scott Albinson, managing director of global regulatory strategy and policy at J.P. Morgan Chase. Still, “there’s a lot of work to be done” to calibrate rules across borders, he said.

Albinson highlighted five areas where harmonization efforts are most needed: foreign branches and affiliates, comparability determinations, trading platforms, trade reporting, and frontloading.

The idea of substituting compliance — e.g. the CFTC determining that regulations of another country are sufficiently rigorous to qualify as compliance with the CFTC, even if the country’s regulations aren’t precisely the same as the CFTC — has helped in moving toward regulatory harmonization but it hasn’t achieved the goal, said Laura Schisgall, general counsel of the legal and compliance departments at Societe Generale Americas.

In Schisgall’s view, margin rules are the most complex and important rules that regulators have to harmonize correctly. If margin rules aren’t harmonized, that will give rise to “interesting” market behavior around arbitrage opportunities.

Featured image via DPC

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