DerivSource Regulatory Harmonisation Podcast (March 2015)

Regulatory Harmonisation Podcast March 2015 Julia:
Hello and welcome to a DerivSource podcast. I’m Julia Schieffer, the Founder and
Editor of
In this podcast we are talking about regulatory harmonisation across borders, or
rather lack thereof. While regulators have been in agreement with the G20
recommendations, there have been some ructions at the national levels, most
notably between the U.S. and Europe. Both jurisdictions have been wrangling for
months over the details, especially the regulation over clearinghouses.
There is hope that the more conciliatory tone struck by Timothy Massad, the new
Chairman of the CFTC will pave the way for more fruitful discussions, but of course
no one expects to see a deal struck overnight.
We asked Stephen Loosley, partner at consultancy Catalyst, how he thinks things
will unfold. Here is DerivSource reporter, Lynn Strongin Dodds speaking to
Stephen Loosley.
Thank you very much for making the time Stephen. The first question really looks
at the reason behind the lack of harmonisation between the U.S. and Europe. So,
what’s your take on that?
Stephen: I think some of the lack of harmonisation is due to maybe domestic users seeking to
protect local markets, they have local market practices that maybe don’t translate so well
between the U.S. and Europe. Some are due to the different characteristics of those
markets, but I think a lot is due to the sheer scale of regulation that’s been undertaken
over the last few years, and I think if you look at regulatory agencies like the CFTC which
have been in existence for a long period of time and have a very embedded take on the
world and a very embedded and rigorous set of regulations as they're applied to the
existing futures markets, it’s an enormous change to try and regulate what is an entirely
new market for them and, to their credit, they’ve done that with really not a particularly
generous set of additional resources handed to them, whereas in Europe the setting up of
ESMA and the new raft of regulatory offices has maybe enabled people to take a slightly
more holistic view of some of the regulations, and I think that shows up in the timelines.
CFTC, very tightly focused on scope, they’re very quick to market with their rules. Europe,
a lot more consultation and a lot, lot slower process. I think both of those two bodies
(ESMA and CFTC) also have to cope with the SEC in the U.S. and there is distinction
between derivatives and derivatives on securities, and you have that in Europe; you just
have ESMA. In the U.S. you have both of those regulatory agencies, with quite a lot of
overlap really trying to implement the same regulations, and none of this is helped by the
differences in legal complexities in regard to things like bankruptcy and insolvency laws
- Page 1 of 5 - Copyright for this document is retained by DerivSource and the document or any excerpts should not be republished or distributed without written notice of Julia Schieffer, of For further information please contact Julia Schieffer at [email protected] Regulatory Harmonisation Podcast March 2015 and the way that the law making frameworks are set up, so really I think both sets of
agencies have had a titanic challenge in trying to implement these at all, let alone being
very harmonised and joined up.
What are the main points of this disagreement then, between the U.S., European and
Asian regulators? There’s been a lot of headlines about mutual recognition of
clearinghouses, is that the main area or are there other topics that are dividing all of
these regulators?
Stephen: I think the point you touched on there about mutual recognition of clearinghouses, Lynn, is
a good one, but actually I see it as a symptom of a slightly wider issue which is the
extraterritorial nature of both the U.S. and European regulations, but particularly the U.S.
ones where, as you say, there is no concept really of regulatory equivalence for things like
clearinghouse recognition, and a lot of the European and Asian market participants and
financial infrastructures have been a little bit aggrieved by the consequences of having to
trade with U.S. counterparties, so things like swap dealer registration is an overhead and a
burden for people who feel that their toes are being a little trodden on by a slightly overzealous regulator perhaps.
EMIR has had a similar impact on parts of Asia as well. There is a greater degree of
regulatory equivalence as regards demonstrating supervisory authorities doing a good job
between, say, Asian jurisdictions and European ones, but again you still have this concept
of country CCP recognition which is quite a burden for some of the non-European or nonU.S. CCPs out there which are still, you know, extremely important institutions in their
I think some of this has been possibly exacerbated by a little bit of regulatory shorttermism, so there’s been a little bit of (to call it colloquially) tit-for-tat behaviour between
the U.S. and Europe in particular so the CFTC declined to grant a full equivalent to
European trading platforms last year in retaliation certain people are speculating for
European policy makers who have refused to accept the U.S. regulations as equivalent,
despite this being granted to a number of Asian jurisdictions.
I think a lot of these tensions are about the extraterritorial reality who perceives who is
overreaching their boundaries. And then there are other slightly more functional areas of
disagreement, or at least of scheduling, where you have the U.S. again being very tightly
controlled on scope and timeline, delivering the Category 2 clearing mandate in summer
2013, whereas in Europe that mandate from ESMA which will hit buy-side clearing still isn’t
in force and probably isn’t expected to be until Q1 next year, and that has impacts upon
the provision of clearing within those markets, so I think you’ve recently seen a number of
- Page 2 of 5 - © Copyright for this document is retained by DerivSource and the document or any excerpts should not be republished or distributed without written notice of Julia Schieffer, of For further info please contact Julia Schieffer at [email protected] Regulatory Harmonisation Podcast March 2015 people like BNY, State Street, RBS withdraw from providing client clearing services, and a
lot of the rationale behind those decisions, and those kind of decisions, is this waiting
game of how long do we have to build for, how long to we have to provide for before we
start seeing a return, because lots of clients, quite reasonably, don’t want to commit
themselves until there’s finality of regulation.
One of the other areas we saw of inconsistency of scheduling and inconsistency in
scheduling having a material effect, was the launch and mandating of SEFs in the U.S., so
Swap Execution Facilities where: all swaps must be traded electronically by a request to
quote or other mechanisms. That still hasn’t reached Europe; the Organised Trading
Facilities that are planned under MiFID II potentially won’t be in until 2017. These things
drive behaviour among banks and market participants.
If you don’t have to trade electronically in Europe but you do in the U.S., where might you
choose to trade? Well, maybe some of that liquidity has escaped the U.S. and moved to
Europe, and some of that clearing liquidity has as well, with institutions who might
otherwise conduct business in the U.S. setting up structures in Europe where they can still
benefit from the openness of the market ahead of those regulatory deadlines for buy side
clearing and for OTF implementation under MiFID II.
Do you think that nationalism is one of the main stumbling blocks for cross-border
reconciliation of derivatives regulations? That the regulators in the U.S. and Europe
and Asia think their regime is more robust or stringent than the other regimes and
that could prove a hindrance to having some kind of resolution or harmonisation of
regulations globally?
Stephen: Yes, I agree there is a good degree of that. I think that manifests itself in attitude, really,
and is back to that point about the CFTC going for a prescriptive approach and tight
scheduling and not too many delays, possibly at the expense of consultation and the
refinement of the regulation that ESMA is able to do under EMIR because they’re not
sticking to the same tightness of schedule.
One of the examples in that might be the account structures within clearing in the U.S.
where you have the legally segregated operationally co-mingled account structure for
positions and collateral, and in Europe you have more physical, full segregation, individual
segregation of accounts. The European model protects both positions and collateral; the
U.S. models protects positions but still leaves omnibus risks around collateral because of
that operational co-mingling. I think you can have an argument there as to is it better to
regulate something that’s 80% there quickly, or something that’s 100% there slowly?
- Page 3 of 5 - © Copyright for this document is retained by DerivSource and the document or any excerpts should not be republished or distributed without written notice of Julia Schieffer, of For further info please contact Julia Schieffer at [email protected] Regulatory Harmonisation Podcast March 2015 There have been merits on both sides of that argument, but clearly those two different
approaches are playing out in a lack of harmonisation between rules.
There is a view though that the new CFTC head, Timothy Massad, is much more
conciliatory than his predecessor, Gary Gensler. Do you think that will be helpful in
moving the process forward and will enable some type of harmonisation with
Europe and Japan?
Stephen: Massad’s approach appears to be interesting so far. I think, so far, he seems to be
adopting a more pragmatic approach than Gensler did. Just this week at the BOCA
Futures Conference, Massad stated that great progress has been made in resolving the
cross-border harmonisation issues, and he’s also been making some encouraging moves
in trying to coordinate and give the appearance of coordination around the global margin
requirements for bilateral margining of uncleared derivatives, which I think is an area
where the industry could really do with some leadership and an area where it’s important
to have that harmonisation to avoid any kind of fragmentation of liquidity.
Big question here: how do you see this being resolved? Do you think that
harmonisation is really possible?
Stephen: I think it is possible. I think with international regulation we need to see the regulators
picking their battles. Something like SEF and OTF harmonisation could have been much
better handled, and would have enabled a much more consistent approach to providing
liquidities both in Europe and in the U.S.
There are some areas where that harmonisation just isn’t a priority, and maybe the
differences that remain between the LSOC account and the individually segregated
account aren’t that important but I do have a sense of optimism as a result of the changes
in leadership and the arrival of Massad, and it is to be hoped that, not withstanding the
domestic considerations, the international banks will also recognise that and recognise
that fragmentation of markets isn’t beneficial. And I think it’s really up to the community of
financial market participants to align their lobbying in those jurisdictions because that really
is one of the drivers of change, and one of the drivers of pace of regulatory
implementation. So I think there’s a lot of responsibility on us as part of the market as well
as well as directly upon the regulators.
My final question is: what happens if there isn’t any harmonisation? What would be
some of the main consequences?
Stephen: I think with financial markets regulation the thrust of it is to provide incentives for market
participants to do things that are in the greater economic good and provide disincentives
for them to behave otherwise. If you have disjoint in regulatory harmonisation then what
- Page 4 of 5 - © Copyright for this document is retained by DerivSource and the document or any excerpts should not be republished or distributed without written notice of Julia Schieffer, of For further info please contact Julia Schieffer at [email protected] Regulatory Harmonisation Podcast March 2015 you create is an environment where people are incentivised to move around jurisdictions,
move and migrate their business, actively migrate their business in and out of regulations
that are progressing at different speeds across jurisdictions. That kind of behaviour
fragments liquidity; it fragments the provision of important hedging and risk management
services to end users as well as increasing the cost, increasing capacity and increasing
the burden of regulation on people. So I think it increases that level of uncertainty, risk
and cost as well as driving fragmentation in liquidity if we can’t get these major jurisdictions
Thank you very much for your time. It’s been very helpful.
Stephen: It’s been my pleasure Lynn, thank you.
Now, I’m interested if our DerivSource listeners agree with Stephen on the possible
progression for improved coordination of regulators across borders, so please do
tell us what you think by commenting on our Podcast Notes page. Otherwise, thank
you for listening to today’s podcast. Tune in next time, and in April for more
analysis and interviews on timely topics.
You can also see more information via the website, and please do subscribe to our
podcast via iTunes or download the free DerivSource app to listen on the go.
Thank you again for listening, join us next time.
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