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Contrary to what some US critics have said, EMIR is broader in scope than the Dodd-Frank Act of 2010, which regulates US markets. And in many ways, the EU rules are stricter. For instance, in Europe, all financial companies regardless of size are required to clear their derivatives trades and report them to trade repositories, and there is no carve-out for foreign-exchange transactions. The EU’s capital standards for clearing houses are much tougher, too. And EMIR’s transparency obligations, both pre-trade and post-trade, are more rigorous than those in force in the US.
Three new supervisory authorities have been created to ensure effective and uniform enforcement across the EU, with binding powers over national regulators. Penalties for unlawful behaviour have been increased. The EU system creates a solid basis for cooperation between international regulators. This is essential because the derivatives market is global and all trades must be regulated in broadly similar ways, wherever they are booked.
Yet in talks over the past two years, finding common ground with the US towards a global system has proved elusive. The European approach is simple: If two countries’ laws address the same concerns -- and offer similar regulatory oversight -- then it is both logical and reasonable to mutually recognise enforcement powers. Some people in the US disagree with this notion and support imposing US rules worldwide. Those who hold this view say they are motivated by the desire to protect US taxpayers from financial crises, whether they occur in the US or elsewhere.
The US approach is flawed because it creates the opportunity for regulatory arbitrage and inconsistencies that put companies in the impossible position of having to comply with rules in one country that are prohibited in another. This fragmentation won’t work in a global market and would impose far higher costs on companies -- including American ones -- that use derivatives as a hedge.