The U.S. Commodity and Futures Trading Commission (CFTC) issued a joint statement with foreign regulators today that outlines plans for cross-border rules. The joint statement was signed by regulatory leaders from Australia, Brazil, the European Union, Hong Kong, Japan, Canada, Singapore, and Switzerland.
The statement, which stems from a private meeting, discusses international plans for dealing with issues of extraterritorial compliance in the OTC derivatives market. In particular, global regulatory organizations are looking to “improve transparency and protect against market abuse, and to prevent regulatory gaps, reduce the potential for arbitrage opportunities, and foster a level playing field for market participants, intermediaries and infrastructures,” the statement said.
CFTC and Extraterritoriality: Substituted Compliance
It’s incumbent upon the CFTC and other foreign and domestic regulatory agencies to establish a rhythm which can suitably guide the global OTC derivatives market and palliate confusion or concern. Though the content of the joint statement is nebulous, it does manage to standardize the cross-border rule making process somewhat.
The price of failing to establish a best practice or standard is unmentionably large. For example, we explained yesterday that Wall Street banks are routing their clients through foreign subsidiaries in order to avoid higher capital requirements, among other cost-prohibitive regulations. We also suggested that the CFTC is unlikely to close this loophole, as it would seem, eventually, that foreign regulators would subject them to similar regulation.
Regulators at the CFTC and elsewhere call this method substituted compliance; it’s basically the idea that one regulator will acknowledge that another regulator has authority, yes, and is using it to implement comparable regulation. Of course, one thing this suggests is that the first team to the finish line will determine the shape of regulation. And that team has so far almost always been made up of U.S. regulators.
Extraterritoriality Update: FX in Europe
Of course, this newfound coziness between foreign regulators doesn’t mean that the same rules will be adopted everywhere. For example, we reported last month that the U.S. Treasury exempted FX swaps from some Dodd-Frank requirements.
Now we’re hearing that it’s unlikely Europe will provide the same exemption. So far it isn’t even on the table.
“We had some discussion about this issue, but there was no-one able to explain to me why there should be a totally different approach for FX markets in comparison to other markets. Of course I’ve learnt what the US did during the weekend – they will not include FX swaps in the Dodd-Frank regime. But that is the US approach. For the moment I don’t see any need to have another approach for FX at the European level. The Parliament’s position is very clear: FX is included in the rules,” German MEP Markus Ferber told FX Week.