06 July 2011

Bloomberg: Differing EU, US derivative rules may discriminate

Banks and other investors may face "discriminatory" and competing sets of rules when they trade in derivatives because of a lack of coordination between the US and the European Union, trade associations said.

Requirements being developed by the US government and the European Commission may lead to “fragmentation of markets, protectionism and regulatory arbitrage”, the groups, which include the International Swaps and Derivatives Association and the Alternative Investment Management Association, said in a letter to Michel Barnier, the EU’s financial services chief, and Timothy F Geithner, the US treasury secretary.

“We believe that both sets of rules, as proposed in the United States and as currently being debated in the EU, leave the global derivatives business with ambiguity and problematic extra-territorial challenges”, the associations said. The rules may also lead to “legal uncertainty and misunderstanding which might give rise to material risk”, they said.

Regulators from the G20 countries have sought to toughen rules on over-the-counter derivatives, such as credit default swaps, after the failure in September 2008 of Lehman Brothers and the rescue of American International Group Inc, two of the largest traders in CDS. The G20 said trades should pass through clearinghouses and be logged in trade repositories.

Investors’ concerns include that they could face competing sets of requirements to post margin on their trades, and different sets of licensing rules on cross-border business.

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