LONDON Failure to thrash out a common supervision of the $640 trillion global financial derivatives industry will split markets and bump up costs for end users, a top regulator said on Monday.
Banks who trade interest rate swaps, credit default swaps and other derivatives are looking to the United States and the European Union to harmonize their approach to new rules aimed at making markets more transparent.
Banks worry that rule clashes and overlaps will create legal uncertainties and extra compliance costs.
David Wright, secretary general of the International Organization of Securities Commissions (IOSCO), an umbrella group for regulators from across the world, warned it was a "recipe for chaos" that could get messy and anti-competitive.
"There is a model here which is a free for all and I think your costs will go up in a free for all," Wright told a conference organized by ICI Global, an asset management industry body.
Wright said slow progress in reaching transatlantic agreement on derivatives rules could see Asian countries such as China and Indonesia going their own way.
"We can honestly say there is a growing frustration, particularly among our Asian Pacific friends about what's happening," Wright said.
"They are fed up being caught between two elephants."
Martin Wheatley, chief executive of Britain's Financial Conduct Authority, told the ICI conference that regulators were committed to avoiding a patchwork quilt of unworkable national and regional rules.
"There are some significant detailed points to work through," Wheatley said.
The U.S. Commodity Futures Trading Commission's chairman, Gary Gensler, due to stand down shortly, has been accused by EU regulators of trying to impose U.S. rules on them.
Daniel Gallagher, a Republican member of the U.S. Securities and Exchange Commission, said in Frankfurt on Monday that on his last visit to Europe, Gensler's name was "like a curse word".
"I've never seen anything like it where one person, one policymaker in Washington has been singled out by name by foreign regulators because of an aggressive approach," Gallagher said.
After the 2007-09 financial crisis, in which derivatives played a core role in exacerbating uncertainty due to their opacity, regulators called for trade repositories to be set up to record transactions for regulators to spot risks.
But Wright said 22 trade repositories have been opened but the system is not working as they are not connected up.
He reiterated his call for a global enforcer that can resolve disputes between countries over market rules.
IOSCO, although grouping all top regulators such as the U.S. Securities and Exchange Commission, Japan's Financial Services Agency and Germany's BaFin, does not have the power to impose the market guidance it draws up or resolve disputes.
"At IOSCO we are beginning to think hard about what is required," Wright said, adding that the body will consult next year on how it could evolve.
Few believe the United States would accept binding requirements from a global securities body. Wright, however, said it would be in the United States' own commercial interests as markets worldwide move to the U.S. model of market-based financing while banks focus on building up their capital buffers.
(Additional reporting by Eva Taylor in Frankfurt, Editing by Susan Fenton and David Evans)