Hong Kong — ISDA recently organized a workshop here in Hong Kong for regulators in the Asia Pacific region. With over 40 representatives from 11 countries in attendance, we had an opportunity to share our views on key issues related to regulatory reform (press release from the event).
A major issue stems from one of ISDA’s core beliefs: derivatives are a global product, transcending borders and facilitating the free flow of capital between countries. As we observe regulatory reform around the world, it leads us to ask, “Do we face the prospect of a less global, more fragmented marketplace?” Unfortunately, the answer is that we might.
The G20 in Pittsburgh in 2009 set out the task for global regulators in addressing reform of the OTC derivatives business. Having been handed the assignment set out in those G20 principles, rule makers around the world have been working for the past two years to implement them. Agreeing on high-level principles is a far different task from working through the nitty gritty of national laws and regulations.
Consistency of regulation has its merits, but it is rarely fully achieved and should not be seen as an end in itself. We always expected there to be variations in how the G20 principles would be translated into local laws. And we certainly did not expect these changes to be cost-free. We are more than familiar with patchworks of laws and regulations. For over 25 years we have been dealing with a variety of legal regimes for derivatives and for enforceability of contracts and collateral arrangements.
What has struck us as far from desirable is the duplication and fragmentation of the market infrastructure that may arise as many jurisdictions pursue their own course. We are seeing a proliferation of proposed clearinghouses and trade repositories, with the potential for conflicting rules on where a trade must be cleared and overlapping requirements for where it must be reported. Uncertainty and duplication are never good for business, and that is particularly true of the derivatives business.
The potential for proliferation was a major topic at our Asia-Pacific workshop. We also heard the regulators’ concerns about ensuring that they have some authority or control over transactions affecting their jurisdiction (such as trades in their currency) and the ability to access information regarding certain trades or their regulated institutions. Their concerns are particularly acute in a crisis situation, when accurate, timely information is needed most.
We appreciate the concern of regulators in getting the information they need, which is why we have been supportive of trade repositories. We also understand their particular interest in certain cleared trades. We wonder, though, whether the fragmentation of the marketplace that is the end result of infrastructure being replicated in jurisdiction after jurisdiction will serve the goal of safe, efficient markets that is so important to ISDA and its members.
It is time to come full circle on the debate on OTC derivatives regulatory reform through reengagement at the international level to coordinate the regulatory response for this global business. ISDA, together with eight other financial trade associations, recently wrote to US Treasury Secretary Geithner and EU Commissioner Barnier raising this very point (read the letter). We urge global regulators, through their various international forums such as the G20, the Financial Stability Board, CPSS/IOSCO, the OTC Derivatives Supervisors Group and the OTC Derivatives Regulators’ Forum, to make the safety and the efficiency of markets paramount. And ISDA is committed to be there as a resource, just as it was recently here in Hong Kong.