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In my judgement, three objectives must be achieved through our cross-border guidance and related relief. First, it must protect US taxpayers and the US financial system. Second, it must embrace a substituted compliance approach that (1) avoids creating uneven playing fields for US financial institutions vis-à-vis each other and foreign competitors and (2) supports an efficient and sound derivatives market structure. Finally, as a mechanical matter, the final cross-border guidance must be clear and workable. By “clear”, I mean that the CFTC’s ultimate approach must contain as little ambiguity as possible concerning the scope and application of US regulatory requirements. By “workable”, I mean it must be implemented over a reasonable period of time, which, in my view, necessarily requires a formal and adequate phase-in period for compliance.
The plain truth is that risk associated with derivatives is mobile and can migrate rapidly across borders in modern financial markets. An equally plain truth is that any efforts to monitor and manage global systemic risk therefore must be global in nature. Yet another plain truth is that prudential regulation has taken into account the foregoing for decades. It alone has not always prevented risk-management failures and the resulting threats to the stability of the financial system.
Risk mobility means that regulators in the US and abroad do not have the luxury of limiting their oversight to financial activities occurring solely within their borders. Financial activities abroad may be confined to local markets in some cases, but the financial crisis, and recent events, make clear that the rights and responsibilities that flow from these activities often are not.