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The European Union and United States are trying to iron out differences between each other's rules to regulate the $630 trillion market for off-exchange traded derivatives like credit default swaps and interest rate swaps. The aim is to meet a pledge made by the Group of 20 leading economies (G20) at the height of the 2007-09 financial crisis to increase regulation in a coordinated way. The EU says some US derivatives rules will encroach on European companies. US regulators say they are legally bound to implement the changes.
David Wright, secretary general of the International Organisation of Securities Commissions or IOSCO, said all models and options for a global watchdog should be evaluated. "We need a type of global de Larosière committee to examine the issues in detail", Wright told Reuters on the sidelines of seminar run by the Financial Markets Law Committee.
Recommendations from a committee chaired by former IMF managing director Jacques de Larosière led to new pan-EU watchdogs for banks, insurers and markets with binding powers over the bloc's member states being created.
IOSCO can only make recommendations and review whether its members, made up of 120 regulators from across the world, apply them but has no power of sanction.
EU financial services chief Michel Barnier told Reuters last month the lack of agreement on derivatives was starting to fragment liquidity and bump up costs.
Larry Thompson, managing director of DTCC, a US clearing and settlement house for securities and which is expanding across the world, said clashing derivatives rules will raise compliance costs, and increase complexity and legal risks.
IOSCO's deputy general Singh also said that global regulatory frameworks for OTC derivatives brought about by the G20 nations and the BCBS were creating a "regulatory race to the bottom" for countries to be the first to push laws to tackle these issues, resulting in regulatory fragmentation. "In order to tackle fragmentation, what is needed is a global institutional framework possibly established by international treaty that has enforcement authority, binding dispute resolution settlement and sanction enforcement capabilities. This, of course, will take a long time but it is important to start the thinking now in terms of what will happen in the future as the complexity and number of issues is only going to increase", Singh said.
While the establishment of a global regulator may be a long-term objective, standard-setting organisations such as IOSCO and the Basel Committee will be crucial in the short term to ensure globally-harmonised rules are adopted by market participants, reducing regulatory arbitrage and systemic risk, he added.
Further reporting © Risk.net (subscription required)