Global regulators promise cooperation on derivatives rules

Wed Dec 5, 2012 11:05am EST

NEW YORK, Dec 5 (IFR) - The Commodity Futures Trading Commission has released a statement outlining the results of a closed-door meeting between international regulators last week that promises widespread international cooperation in the implementation of global derivatives market reforms.

The message is likely intended to provide comfort to derivatives market participants and the rest of the international regulatory community who have jointly decried the CFTC's approach to safeguard U.S. markets from abuses in the derivatives market via newfound regulatory powers provided in Dodd-Frank.

Specifically, the regulators agreed to work together on resolving four major issues; applying a globally consistent clearing mandate for over-the-counter products, sharing constituent information and cooperating on enforcement actions, working to align implementation schedules and allowing for temporary exemptions where completion dates are not aligned, and allowing specific financial entities to substitute compliance with US rules when home regulators' frameworks are robust and similar.

But the release does not address the upcoming expiration of a no-action letter provided by the CFTC that essentially exempts a wide swath of foreign financial institutions from the risk of receiving enforcement action for dealing in swaps with U.S. entities without being in Dodd-Frank compliance. The letter expires at the end of December.

"[This release] really further drives home the need for something more concrete from the CFTC with respect to 2013," said one derivatives lawyer based in New York.

"On a superficial level, the wording in the release with regard to implementation timing is comforting in that it pledges cooperation, but the question is how to turn that comforting vibe into something more concrete. What is that action that is going to emanate from [the release] between now and the end of the month?"

The statement was the result of a meeting last Friday between a host of international regulators. In attendance were representatives from Australia, Brazil, the European Commission, the European Securities and Markets Authority, Hong Kong, Japan, Canada, Singapore, Switzerland, the CFTC, and the U.S. Securities and Exchange Commission.

"We also recognize that conflicting or inconsistent cross-border application of rules to market participants, intermediaries, infrastructures and products may inhibit the execution or clearing of certain cross-border transactions or impose additional compliance burdens," said the release.

"We further recognize that regulatory gaps may present risks to financial markets and provide the potential for regulatory arbitrage."

The same regulators had met publicly at the beginning of November, when the goal of international harmony was relayed to the market without providing much by way of concrete solutions.

Yesterday's release provided some specifics, including the intention of the informal coalition to follow cooperation arrangements used by the International Organization of Securities Commissions for both supervision and enforcement of the new derivatives rules.

Issues surrounding disclosure requirements were considered a major problem for European banks who recognised that CFTC requirements would conflict with European privacy laws, specifically.

Banks also feared duplicative enforcement action for the same offences, a problem addressed in part by the IOSCO arrangements.

The group plans to meet again in Brussels in January 2013, according to the release, to "inform each other of the planned timing of the finalization and implementation of our rules and advise of possible transition periods and update each other on progress on the concrete steps being taken in our own jurisdictions to improve global regulatory oversight in these markets."

The regulators say they will also discuss the other issues at a meeting in "early 2013", but did not promise January.

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