06 July 2011

FT: Warning over diverging derivatives rules

Proposed rules for derivatives trading could push up financing costs and create “material risks” for the global economy because of a lack of co-ordination, the US and European Union have been warned by the financial services industry.

The warning is contained in a letter sent on Wednesday by eight leading trade associations – including the European Banking Federation, the Futures and Options Association, the Investment Management Association and the Wholesale Market Brokers’ Association – to Tim Geithner, the US Treasury secretary, and Michel Barnier, EU internal market commissioner.

The letter warns that the extra-territorial effect of separate legislative initiatives in the US and Europe could have “significant adverse consequences” for financial and non-financial companies and for the wider global economy. It says: “Even if extra-territorial application of domestic rules and the associated erection of artificial barriers to the functioning for businesses with an international footprint is not the intention, in many instances the economic effects often associated with protectionism will result.”

The associations detail some areas where they see problems. These include duplicative licensing, authorisation and registration regimes, the extraterritorial application of margin requirements to the non-US offshoots of US financial firms, and similar dual requirements for US subsidiaries of non-US firms. The associations suggest a “mutual recognition” system between regulators, limiting the extra-territorial reach of their rules, provided firms comply with home country regulations. They also suggest similar arrangements should apply to clearing counterparties, so that regulators agree standards for “equivalence” and can recognise CCPs that have been approved in each other’s jurisdictions.

And they urge regulators to avoid discriminatory rules vis-à-vis locally-regulated firms dealing with sovereigns from other jurisdictions. They point out that proposed rules in both the US and EU would require sovereigns outside these jurisdictions to post margin with the firms regulated under each set of regulations. “We believe that there remains considerable scope . . . to prevent, alleviate or limit the harmful effects of such overlapping, inconsistent and ambiguous rules . . . regulators should seek to limit the damaging effects of divergence either by consultation . . . or by resolving these differences in the course of implementation of legislation”, they say.

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