ISDA CEO Scott O’Malia authored the blog post “No Answer Yet to Cross-Border Concerns.” The piece focuses on the long-running negotiations between U.S. and EU regulators regarding mutual recognition of clearinghouses.
According to Mr. O’Malia, while U.S. and European regulators are continuing their efforts to reach agreement on clearing house rules, it seems an agreement is unlikely “before the third quarter at the earliest.” He explained that cross-border issues are of particular concern for ISDA members, since without an 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.” Mr. O’Malia stated that as a result, many members are opting to trade with counterparties in their own jurisdictions “leading to a fragmentation of liquidity along geographic lines.”
In the meantime, Mr. O’Malia noted that ISDA has been working hard on the harmonization issue, and has published principles in papers on CCP recovery, trade reporting and trade execution. He stated that abiding by these principles when developing rules “will increase the likelihood of substituted compliance/equivalence determinations.”
Lofchie Comment: Under its prior leadership, the CFTC bet heavily that if it rushed to adopt rules, other nations would be forced to follow, even though no consensus had been formed as to the rules adopted by the CFTC. The CFTC lost that bet as European and Asian regulators not only rejected the U.S. rules, but also took out their rejection on U.S. market participants; e.g., the refusal of the European regulators to give the same regulatory recognition to U.S. clearing houses as was given to Asian clearing houses. The consequence has been a diminution of the United States as a center for global finance (instead, the world’s finances are being siloed into the Americas, Europe and Asia as distinct markets). ISDA CEO O’Malia makes plain a number of the particulars.
CFTC Chair Massad has made some progress in healing the rift between U.S. and European regulators, but it does not seem likely that all of the damage can be undone. So long as European firms are likely to gain market share at the expense of U.S. firms if global markets are split, the Europeans are likely to continue to disagree with the imposition of the CFTC rules. At some point, it becomes sensible for U.S. regulators to concede to tolerating the European rules or to acknowledging that the world financial markets are being divided into three, with the consequent damage to our global economic position.