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First, regulators need to rely more on foreign regulation when it achieves the same regulatory outcomes. This avoids overlaps, inconsistencies, and conflicts. Second, the recently published standards for bilateral clearing, which are very granular, provide a golden opportunity for consistent global implementation of this very important part of the OTC derivatives market. Thirdly, with OTC derivatives reforms now moving into the implementation phase and subsequently supervision, close cooperation between supervisors across jurisdictions becomes even more important.
Obstacles to consistency
While we are striving to achieve consistent international regulation and supervision of OTC derivatives markets, let me manage your expectations regarding the likelihood of it being achieved. Unfortunately, there are various additional reasons why we may not reach the goal of full global consistency.
First, like any other piece of financial legislation, OTC derivatives legislation is established by independent sovereign states or, in the case of the EU, a bloc of sovereign states. National political processes take local characteristics of financial markets into account, and it is not a secret that legislation sometimes reflects local private interests. Hence, local exemptions for certain market participants create consistency problems at global level.
Second, the OTC derivatives markets are undergoing a massive change from being unregulated to being fully regulated. These changes are not about tinkering around the edges but rather about a momentous regulatory step change. Coordinating a massive regulatory change is obviously more difficult than coordinating a marginal adjustment to an existing regulatory framework.
So far, I have been silent on the role of organisations like the G20, FSB, IOSCO, BCBS, and CPSS, who, without any doubt, have all been essential in shaping the reform of OTC derivatives regulation. The G20 commitments have of course been instrumental in setting the broad requirements and timeline for OTC derivatives reform, and the FSB has been crucial in monitoring its progress. The well-known CPSS-IOSCO Principles for Financial Market Infrastructures have standardised requirements for CCPs across the world and contribute to reducing regulatory arbitrage. However, we should also admit that they were not sufficiently granular to ensure full consistency across the globe. When implementing them locally, regulators still had many choices to make which has resulted in international diversity.