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The US took the lead in implementation through its Dodd-Frank Act. Mandatory reporting and clearing for swaps have been phased in for US dealers and asset managers this year. A requirement for swaps to be traded on electronic platforms took effect in September. In Europe, trade reporting for OTC derivatives is set to begin from next February with mandatory trading and clearing to follow. This misaligned timing has left firms based in Europe and Asia uncertain how Dodd-Frank rules applied to them, depending on the counterparties they traded with, while US firms needed clarity on how their overseas subsidiaries may be captured by local regulators.
In July, Gary Gensler, chairman of the US derivatives regulator, the Commodity Trading Futures Commission, and Michel Barnier, head of internal market and services at the European Commission, presented the “Path Forward” statement, intended to foster US-EU understanding of how the cross-border rules should work. Since then there has been little action. The CFTC obligation to clear swaps, introduced in March 2013, included an exemption for the overseas or linked operations of US banks until October 9. After that, non-US firms were required to clear their trades if their broker or trading counterparty was classed as a US branch under Dodd-Frank.
Discontent reached such a pitch that late in the year trade bodies started litigation against the US regulator. David Wright, secretary general of the International Organization of Securities Commissions, said: “We have clear overlaps of rules. If we don’t have mechanisms to deal with these difficulties, the situation will just get more and more complex.” Anthony Belchambers, chief executive of the Futures and Options Association, said: “These territorial wars between regulatory authorities over cross-border business are destructive in terms of increasing legal risk and compliance risk quite seriously. It also raises costs and confuses customers.”
Market participants will await the outcome but must also prepare for the rules as they stand, lawyers say. Even if the issues are resolved next year, many believe the damage to the market could be irreparable. Wright said: “These problems will get worse. If everyone continues to act in a national sense we will have a jigsaw puzzle where nothing fits together. It will result in huge costs for firms and will result in a more concentrated financial market where only the big players will have the resources to manage their way through a myriad of complexity.”
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