US and European regulators continue in their efforts to reach agreement on their clearing house rules. The long-running negotiations over a possible European Union equivalence decision for US central counterparties (CCPs) have recently centred on divergences in the margin methodologies for futures. It is hoped a data-collection exercise on required margin under both methods will help resolve the deadlock. But, following a recent meeting between the European Commission and Commodity Futures Trading Commission, it now seems an agreement is unlikely before the third quarter at the earliest.
Those of you who attended ISDA’s 30th annual general meeting (AGM) in Montreal last month will know cross-border issues like these are a major concern for ISDA’s members. Over the past few years, regulators have developed rules for their own markets, with too little regard as to how they will align with those in other jurisdictions. In the absence of a transparent and effective process for recognizing and deferring to comparable regimes, globally active derivatives firms face the prospect of having to meet duplicative and potentially contradictory rules. Many are opting to trade with counterparties in their own jurisdictions as a result, leading to a fragmentation of liquidity along geographic lines, as ISDA’s most recent research on this topic shows. Liquidity fragmentation means end users face less choice, higher costs and less ability to put on or unwind hedges, particularly in stressed markets.
In order to resolve this, ISDA believes substituted compliance/equivalence determinations should be based on broad, intended outcomes, rather than making rule-by-rule, line-by-line comparisons of the two sets of rules. And ISDA isn’t alone in this. During a panel on cross-border harmonization at last month’s AGM, a group of leading regulators recognized the limitations of an overly granular approach to equivalence. A number of suggestions emerged during that discussion: a global equivalence ‘passport’; automatic equivalence for Group of 20 countries; a greater role for the Financial Stability Board or International Organization of Securities Commissions in creating global standards.
One thing became very clear, however – it comes down to trust. And that’s something the panelists agreed is missing at the moment.
It’s not all about the regulators, though. The industry can – and should – do what it can to promote greater harmonization. ISDA has been working hard on this issue, and recently published principles papers on CCP recovery, trade reporting and trade execution. We believe that abiding by these principles when developing rules will increase the likelihood of substituted compliance/equivalence determinations.
Take data reporting, for instance. One of the ISDA principles focuses on the need to develop and agree common data standards. ISDA has long played a part in developing common taxonomies, a common reporting format in FpML, and common identifiers for trades and products. The most recent development is the launch of a freely available online tool – UTIPrefix.org – that enables derivatives users to apply a standard methodology to generate a unique trade identifier prefix using their legal entity identifier code. ISDA stands ready to further develop data standards as necessary.
On a separate note, I very much enjoyed seeing so many of you at this year’s AGM, and I hope you found the sessions as useful as I did. I hope you also took the opportunity to read through our new ISDA magazine, which we launched at the AGM. IQ: ISDA Quarterly is intended to bring members and non-members the best research and information about the derivatives market – and the next issue will focus on some of the cross-border themes raised during the AGM. As always, we welcome your feedback.