Transatlantic Group Urges Cross-Border Regulatory Harmony

Terry Flanagan

Regulators from across the globe are being encouraged to establish a more coherent regulatory framework, in order to address concerns over extraterritoriality and protectionism, as some market participants are calling for the pre-financial crisis dialogue on regulatory recognition to be urgently resumed.

“You are seeing growing strands of regulatory extraterritoriality—we are in a world of clashing rules,” Anthony Belchambers, chief executive of the Futures and Options Association (FOA), a European trade association for the derivatives market, told Markets Media.

A group of trade bodies from both sides of the Atlantic, called the EU-US Coalition on Financial Regulation, which has been in operation since 2005, says that the current regulatory stances of Europe and the U.S. are encouraging legal risk, compliance complexity, regulatory uncertainty and added transactional costs in an increasingly fragmented approach.

Belchambers acknowledged that the “regulatory repair agenda” following on from the global financial crisis of 2008 was needed but the coalition, of which the FOA is part, warned in a new report called ‘Interjurisdictional Regulatory Recognition: Facilitating Recovery and Streamlining Regulation’ that this regulatory overhaul was now becoming inconsistent with the wishes of the G20 group of nations’ diktat in 2010 “to ensure open capital markets and avoid financial protectionism”.

The coalition, in its report, acknowledged that there will be differences in the overarching legal systems, market practices and regulatory priorities of the European Union and the U.S., but they are of the view that there is a common foundation between their regulatory policies, objectives, standards and outcomes. These, the coalition says, are sufficient to secure a level of regulatory inter-reliance that will help to sustain the international competitiveness of transatlantic business.

“Energizing business recovery and economic growth is critical to post-crisis recovery,” said Belchambers. “The transatlantic marketplace—through which 80% of the world’s financial business flows—could have a major part to play in that process, but not if its regulatory framework is marked by fragmentation and conflict.

“Regulatory coherence is essential if the international competitiveness of the transatlantic marketplace and its contribution to global recovery is to be sustained. That requires an urgent resumption of the pre-crisis dialogue on regulatory recognition.”

The report says that the International Organization of Securities Commissions (Iosco), an umbrella group of global regulators, with its 38 Objectives and Principles of Securities Regulation, which were originally produced in 1998 and updated in 2010, provide an internationally-accepted foundation of regulatory adequacy.

“In today’s global economy, it’s vital that we resume the dialogue to streamline regulation across borders,” said Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association, another trade body.

“This is essential if financial markets are to continue to supply and allocate capital efficiently and at low cost. Further, it’s critical that regulators take the time to assess the cumulative impact of new rules being implemented across jurisdictions to avoid market disruption and unintended penalties to economic growth.”

A plethora of financial regulations are either beginning to or will soon impact on firms on both sides of the Atlantic, including the Dodd-Frank Act in the U.S. as well as the updated Markets in Financial Instruments Directive and European Market Infrastructure Regulation in Europe. The new regulations, some of which have yet to be fully defined, differ in some important aspects and the coalition wants to ensure mutual recognition, for instance, when regulators finalize the new OTC derivatives rules that are likely to become law from the start of next year.

“We have serious concerns about the inconsistency of rules between key regulatory jurisdictions,” said Robert Pickel, chief executive of the International Swaps and Derivatives Association, a trade body. “The OTC derivatives market is an inherently global market that successfully operates across jurisdictions.

“Greater focus needs to be placed on ensuring a globally co-ordinated regulatory approach that ensures a level playing field and avoids the potential for fragmentation and regulatory arbitrage.”

Walt Lukken, president and chief executive of trade body the Futures Industry Association, added: “The EU and the U.S. account for the majority of global trading in derivatives, so it is especially important for these two jurisdictions to achieve regulatory harmonization.”

The coalition believes that any regulatory interdependence will require a greater degree of in-depth analysis and due diligence, if it is to be credible and effective, and says that it may be necessary to go beyond the Iosco principles in this way, particularly in the area of supervision and enforcement, to build a credible starting-point for building international regulatory accreditation.

“Mutual regulatory recognition is critical for national supervisors seeking to implement post-crisis regulatory repair within the context of national laws and market structures, while also allowing for regulatory compatibility to address the global nature of financial service businesses,” said Cecelia Calaby, executive director at trade body the American Bankers Association Securities Association.

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