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We have come a long way in writing rules. We have come a long way in implementing the promises we have made to each other and to the rest of the world. But we are now down to the hard task of making sure that our jurisdictions have rules that work well together because of the international nature of so many of the firms and so many of the transactions in the financial sphere.
We don't want duplication or extra-territorial overreach. We don’t want to create unwelcome opportunities for regulatory arbitrage and we certainly don't want practical implementation which thwarts the very positive purpose for which the rules were put in place at the outset.
The interconnectedness of our economies means that we have a responsibility to work consistently together. So now is the time for us to make sure that our rules actually work together and the best way to do that is to put in place robust legal frameworks in our respective domestic jurisdictions and then make sure that globally active institutions aren’t penalised when they are being active in both of our jurisdictions.
They should not escape or undermine regulation by exploiting contradictions between those systems. And we certainly don’t want to give them reasons to move their business to more loosely regulated venues, sparking another international race to the bottom.
A lot of this comes down to trust, to forging alliances and to acting in each other’s as well as one's own interest. It is also about being realistic. There is a big difference between claiming jurisdiction over market participants and transactions beyond your borders and actually being able to enforce those rules effectively outside your jurisdiction. Neither we, nor I suggest the American regulators, will ever have enough resources to act as the financial police force of the world…
Faull then went on to list the extensive reform agenda the EU has pushed through over the last five years, urging the US “to press ahead with the adoption of international accounting standards – IFRS – instead of delaying this process further.”
OTC derivatives
Faull said there was still a lot that could be done in close cooperation with the US, citing OTC derivatives as an example. “Derivatives are complex and there are still problems making this agreement stick and work properly. We still need to find a solution on how to deal with our different CCP margin requirements. And we need to obtain relief for EU venues from US Swap Execution Facility rules.
Just last week Commissioner Barnier wrote to CFTC Chair Gary Gensler to press for this relief. This is because our own rules governing trading platforms, we call it in European jargon MiFID, will come into play soon, and the last thing we need is duplication of slightly different rules. We calculate that this market is worth $633 trillion and it needs to be regulated, it needs to be supervised, it needs to be transparent, it does not need to be unduly disrupted.
This is not about deregulating, it is not about letting financial markets off the hook. Both the EU and the US now have robust rules in place. We worked closely together to get them recognised internationally and then onto our statute books. We now have to work closely together in implementing them and recognise each other’s rules. What you call swap dealers, major swap participants or swap execution facilities should be allowed to comply with US requirements by virtue of complying with EU rules. And vice versa. Now this area of OTC derivatives is only one, but it was one on which after months of difficult discussions, we were able to find agreement. It led to uncertainty in the market and it was finally concluded in the eleventh hour with deadlines looming.
This is not the best way to conduct international discussions between closely related partners in such important and sensitive areas. This is why we believe we need a platform and an accountable process to agree coherent financial services rules to bring about consistent implementation. In this respect, the TTIP is an opportunity which should not to be missed.
TTIP
What we believe we do need is a better framework for that dialogue and the TTIP provides that framework. It would help strengthen cooperation between regulators and supervisors and provide the best platform for mutual reliance. It would lead to we hope a results-orientated approach, avoiding regulatory barriers of the kind that can unnecessarily damage the ways markets function. This, in turn, would result in better management of potential risks and could help us avoid excessive regulatory complexity. I think if we achieve all that we would be making a considerable contribution both to the US and the EU but also to market players on both sides of the Atlantic.
Where differences cannot be removed and they inevitably will not all be, we should be look for an outcome-based approach, creating mechanisms based on equivalence or what you call substituted compliance. It would help transatlantic trade to flourish. Safely. And it sends a strong message to the rest of the world about the quality of our rules and our cooperation in enforcing them.
The discussions will not be easy. I am aware of the debates raging in this city. But I do hope that the US will be convinced that this is an opportunity to engage with us on financial regulation, which will not come again in this forum for some time. Regulators should lead the exercise on both sides of the Atlantic making sure that the specificities of the financial sector are properly taken into account. Trade negotiators for their part have to understand (and I'm certain that they do by the way) that issues related to the stability of financial markets are sensitive for the economy as a whole. So that the risks of including financial services in the TTIP are limited...
When it comes down to it the actual rules are made in each domestic jurisdiction, democratically by parliaments and ministers and that's what we're doing now. The ultimate rule making happens even at further subordinate level, agencies, authorities either side of the Atlantic. That's what has to work together, it is an extremely complicated machine but getting it 99 per cent right is not good enough because the 1 per cent we don't get right can cause enormous friction and lead to the undermining of the purpose for which we are doing this.
The EU and the US have put in place and are still putting in place robust regulatory frameworks. We are world leaders in setting standards in this field. We have a strong interest in making transatlantic financial markets work properly and work better. We have a very good history of cooperation. And we share an ambition for a safer, more stable, and more productive financial sector on both sides of the Atlantic. All we have to do now is make it happen.