LONDON (Reuters) - A new global watchdog with binding powers is needed to resolve disputes like the current clash over derivatives rules that threatens to undermine financial stability, top market officials said.
The European Union and United States are trying to iron out differences between each other’s rules to regulate the $630 trillion market for off-exchange traded derivatives like credit default swaps and interest rate swaps.
The aim is to meet a pledge made by the Group of 20 leading economies (G20) at the height of the 2007-09 financial crisis to increase regulation in a coordinated way.
The EU says some U.S. derivatives rules will encroach on European companies. U.S. regulators say they are legally bound to implement the changes.
David Wright, secretary general of the International Organization of Securities Commissions or IOSCO, said all models and options for a global watchdog should be evaluated.
“We need a type of global de Larosiere committee to examine the issues in detail,” Wright told Reuters on the sidelines of seminar run by the Financial Markets Law Committee, a London-based independent group of legal experts.
Recommendations from a committee chaired by former IMF managing director Jacques de Larosiere led to new pan-EU watchdogs for banks, insurers and markets with binding powers over the bloc’s member states being created.
Wright said there is no global body to resolve cross-border disputes and enforce agreements on financial rules.
IOSCO can only make recommendations and review whether its members, made up of 120 regulators from across the world, apply them but has no power of sanction.
“The reality is you do it if you like it and you probably don’t if you don’t like it. As the number of major interconnected capital markets grows, this problem will become more acute,” he told the seminar.
A body like the World Trade Organisation with binding powers could help avoid rule clashes fragmenting markets, Wright said.
Financial lawyers at the event doubted such a new body could be set up overnight given that U.S. Congress would likely be lukewarm at best on giving up any regulatory sovereignty.
EU financial services chief Michel Barnier told Reuters last month the lack of agreement on derivatives was starting to fragment liquidity and bump up costs.
Larry Thompson, managing director of DTCC, a U.S. clearing and settlement house for securities and which is expanding across the world, said clashing derivatives rules will raise compliance costs, and increase complexity and legal risks.
“It does not bode well for financial regulation in the future. It’s unclear if the derivatives rules will be converged in the long term,” Thompson told Tuesday’s seminar.
It was time to consider a global watchdog, such as a beefed up IOSCO with binding powers, and the derivatives market would be a “good laboratory”, Thompson added.
“I do believe we have to start thinking outside the box and a WTO for the global financial industry is an idea that needs to grow,” Thompson said.
Reporting by Huw Jones; editing by David Evans