August 29, 2012

Exporting Regulation

Hester Peirce

Former Senior Research Fellow
Summary

The CFTC, in a blitz of rulemaking, has outrun its fellow regulators in achieving the G20 objectives. Unfortunately, speed has come at the expense of workability. Implementation difficulties are perhaps most pronounced with respect to the international application of the CFTC’s rules. The CFTC has opted for an expansive approach that places it at odds with foreign regulators and threatens to expose firms to multiple sets of rules.

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Monday was the last day for commenters to weigh in on the Commodity Future Trading Commission’s draft guidance about how it will handle international issues with respect to over-the-counter derivatives.  These financial products, which are used to hedge interest rate and other business risks, are bought and sold in global markets.  The usual cast of characters has written in–self-described public interest groups calling for a tougher approach and industry associations calling for a laxer one–but a number of exasperated regulators also weighed in.  Judging from these letters, their aspirations of harmonious international cooperation are giving way to the reality that the CFTC’s regulatory appetite is never satisfied.

In September 2009, the G20 nations came to a joint agreement that the over-the-counter derivatives markets were in need of a new regulatory framework.  Since then, legislators and regulators across the world have been working on putting that new framework in place in their own countries. 

The CFTC, in a blitz of rulemaking, has outrun its fellow regulators in achieving the G20 objectives.  Unfortunately, speed has come at the expense of workability.  Implementation difficulties are perhaps most pronounced with respect to the international application of the CFTC’s rules.  The CFTC has opted for an expansive approach that places it at odds with foreign regulators and threatens to expose firms to multiple sets of rules. 

In a Financial Times piece, European Union Commissioner Michael Barnier, who oversees European financial regulatory policy, warned that with respect to international derivatives regulation, “[t]he biggest danger to success is that of excessive attempts by regulators to exercise authority beyond their normal boundaries.” 

Shortly after he issued that warning, the CFTC came out with its proposed guidance on the cross-border application of its rules.  Judging from the responses, Mr. Barnier’s concerns have not been addressed.  Japan’s regulators, for example, asked the CFTC “to reconsider the necessity of extraterritorial application of U.S. derivatives regulations…to Japanese financial institutions established and conducting business in Japan.”  The European Commission commented that if the CFTC proceeded as proposed, “the G20 commitments will not be met” and “an uncoordinated, duplicative international framework” could result, which would “bring neither comfort to regulators and policymakers, nor clarity and transparency to market operators.”  Similar critiques came from regulators across the world.

Foreign regulators have good reason to be unhappy.  The CFTC’s proposed approach is ambiguous in intent, expansive in scope, confusing in application, and harmful in effect.  Regulators reacted to the proposal with requests for greater clarity, appropriate deference to effective foreign regulatory regimes, and an appreciation for the potential harm that the CFTC’s expansive approach could have on the operation of derivatives markets.  They also called for the CFTC to take more time to work through the issues cooperatively with its fellow regulators.

The CFTC would do well to stop trying to export its regulations to countries that, judging from the comment letters, neither want it nor need it.  Listening carefully to foreign regulators’ concerns would be a good first step towards restoring the international cooperation that is essential for the effective regulation of an international marketplace.