SEC Commissioner Offers Recommendations on Implementing G20 Swaps Reforms

SEC Commissioner Hester M. Peirce offered recommendations to regulators on implementing G20 swaps reforms. Ms. Peirce said that the G20 reforms were not foolproof and encouraged regulators to exercise “healthy skepticism” when implementing them.

In remarks before the International Regulators Conference, Ms. Peirce said that “poorly designed regulations” played a role in the 2007-2009 financial crisis. She cited the “favorable regulatory treatment given to highly rated securitization tranches.” She stated that, among other things:

  • “central clearing is not a panacea” and brings its own risks;
  • regulators should attend to market feedback and market professionals’ knowledge when considering rulemaking; and
  • regulators must consider more flexible regulation rather than a one-size-fits-all approach.

In implementing the regulatory framework for security-based swaps, Ms. Peirce advised, the SEC should:

  • reexamine proposed and final regulations to ensure that the regulatory framework serves its intended purpose;
  • devise clear rules and provide guidance instead of relying on staff no-action letters;
  • streamline regulatory processes so that the agency can promptly respond when implementation issues arise;
  • ensure that the compliance periods for rules provide the market with sufficient time to prepare for and then comply with requirements; and
  • provide that multiple rule sets do not overly burden market participants.

In addition, Ms. Peirce advocated for regulatory cross-border deference as international regulators develop their framework for security-based swaps. According to Ms. Peirce, regulatory cross-border deference will ensure that the global over-the-counter derivatives market can serve the risk management needs of companies throughout economies.

Lofchie Comment: Commissioner Peirce’s call for the regulators to be self-critical is welcome. Likewise are her suggestions that both the causes of the financial crisis and the regulatory responses to it be critically re-examined.

There are, however, important challenges to her stated goals. Is it possible to have multiple regulators both be open to ongoing regulatory review and revision and, at the same time, to conform their own rules? It is certainly good news that the CFTC and the SEC are cooperating now; but will the agencies be able to sustain such cooperation over the long term?

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